United Nations Conference on Trade and Development

World Investment Report 1998
Trends and Determinants

United Nations New York and Geneva, 1998

UNCTAD serves as the focal point within the United Nations Secretariat for all matters related to foreign direct investment and transnational corporations. In the past, the Programme on Transnational Corporations was carried out by the United Nations Centre on Transnational Corporations (1975-1992) and the Transnational Corporations and Management Division of the United Nations Department of Economic and Social Development (1992-1993). In 1993, the Programme was transferred to the United Nations Conference on Trade and Development. UNCTAD seeks to further the understanding of the nature of transnational corporations and their contribution to development and to create an enabling environment for international investment and enterprise development. UNCTAD's work is carried out through intergovernmental deliberations, technical assistance activities, seminars, workshops and conferences. The term “country” as used in this study also refers, as appropriate, to territories or areas; the designations employed and the presentation of the material do not imply the expression of any opinion whatsoever on the part of the Secretariat of the United Nations concerning the legal status of any country, territory, city or area or of its authorities, or concerning the delimitation of its frontiers or boundaries. In addition, the designations of country groups are intended solely for statistical or analytical convenience and do not necessarily express a judgement about the stage of development reached by a particular country or area in the development process. The following symbols have been used in the tables: Two dots (..) indicate that data are not available or are not separately reported. Rows in tables have been omitted in those cases where no data are available for any of the elements in the row; A dash (-) indicates that the item is equal to zero or its value is negligible; A blank in a table indicates that the item is not applicable; A slash (/) between dates representing years, e.g., 1994/95, indicates a financial year; Use of a hyphen (-) between dates representing years, e.g., 1994-1995, signifies the full period involved, including the beginning and end years. Reference to “dollars” ($) means United States dollars, unless otherwise indicated. Annual rates of growth or change, unless otherwise stated, refer to annual compound rates. Details and percentages in tables do not necessarily add to totals because of rounding. The material contained in this study may be freely quoted with appropriate acknowledgement.

UNITED NATIONS PUBLICATION Sales No. E.98.II.D.5 ISBN 92-1-112426-3 Copyright © United Nations, 1998 All rights reserved Manufactured in Switzerland

The eighth annual World Investment Report is issued at a time when the process of globalization is under close scrutiny. Even as countries continue to forge stronger economic links with one another, in the past year unexpected financial shocks have interrupted the economic progress of a group of previously fast developing countries in Asia. This has provoked renewed interest, especially from a policy perspective, in the modes of internationalization, including through foreign direct investment. The World Investment Report 1998 (WIR98) explores the implications of the Asian financial crisis for foreign direct investment in and from the affected Asian economies. As usual, it provides an analysis of current trends in foreign direct investment and international production by transnational corporations, examining key aspects of the world’s largest transnational corporations, and noting major regulatory changes at the national and international levels. It provides a breakdown of regional FDI trends, and examines specific issues related to the role and impact of foreign direct investment in various parts of the world.

WIR98 also reviews the locational factors that determine the flows of foreign direct investment to host countries, and the evolving nature of those determinants as transnational corporations adjust their strategies to the pressures of increased international competition. Among other issues, it addresses the influence of regional and multilateral frameworks on the location of international production and foreign direct investment flows.
In discussing these trends and issues, WIR98 contributes to an improved understanding of the role of foreign direct investment in the world economy and to the ongoing discussion in all quarters on globalization. It will also help stimulate the debate on financing for development that the General Assembly of the United Nations will consider in 1999.

New York, August 1998 Nations

Kofi A. Annan Secretary-General of the United

The World Investment Report 1998 was prepared by a team led by Karl P. Sauvant and comprising Victoria Aranda, Persephone Economou, Wilfried Engelke, Masataka Fujita, Kálmán Kalotay, Padma Mallampally, Ludger Odenthal, Assad Omer, Jörg Weber, James Xiaoning Zhan and Zbigniew Zimny. Specific inputs were received from Bijit Bora, Sew Sam Chan Tung, Anna Joubin-Bret, Mina Dowlatchahi, Gabriele Koehler, Menelea Masin, Anne Miroux, Marko Stanovic and Anh Nga Tran-Nguyen. The work was carried out under the overall direction of Lynn K. Mytelka. Principal research assistance was provided by Mohamed Chiraz Baly, Lizanne Martinez and Bradley Boicourt. Research assistance was provided by Rohan Patel, Katja Weigl, Makameh Bahrami and Paul Baker. A number of interns assisted with the WIR98 at various stages: Maria Giovanna Bosco, Ozavize Lawani, Ju-Young Lee, Bruno Le Feuvre, Jennifer Lynn McDonald, Alain-Christian Pandzou and David Pritchett. The production of the WIR98 was carried out by Jenifer Tacardon, Christiane Defrancisco, Medarde Almario, Florence Hudry, Hélène Dufays, Atsedeweyn Abate and Bartolomeo D’Addario. Graphics were done by Diego Oyarzun-Reyes. It was desktoppublished by Teresita Sabico. The Report was edited by Vishwas Govitrikar and copy-edited by Frederick Glover. Experts from within and outside the United Nations provided inputs for WIR98. Major inputs were received from Thomas L. Brewer, Jaime Crispi, Robert E. Lipsey, Michael Mortimore, Peter Nunnenkamp and Terutomo Ozawa. Inputs were also received from Rakesh Basant, Christian J. Bellak, Alvaro Calderón, Pankaj Chandra, Daniel Chudnovsky, Michel Delapierre, E.S. Dussell Peters, Frank Dutman, Reinaldo Gonçalves, Anabel Gonzalez, Edward M. Graham, Fabrice Hatem, Eduardo Hecker, Katharina Helmstedt, Grazia Ietto-Gillies, Yong-Hwan Lee, Mark Mason, Sheila Page, Nipon Poapongsakorn, Jason Praetorius, Eric D. Ramstetter, Jacques Sasseville, Marjan Svetlicic, Douglas van den Berghe, Rob van Tulder, Lise Weis, Obie G. Whichard, Guoming Xian and Yew Siew Young. A number of experts were consulted on various chapters. Comments were received during various stages of preparation (including expert meetings) from Jamuna Prasad Agarwal, Manuel R. Agosín, Charles Arden-Clarke, Octavio Barros, Atchaka Brimble, Luz Curiel Beaty, Paul Bennell, Michael Blank, Susan C. Borkowski, Dali Bouzoraa, Eva Bursvik, John A. Cantwell, Jenny Cargill, Andrew Cornford, Dieter Ernst, Arghyrios A. Fatouros, Jarko Fidrmuc, Gunnar Fors, John Gara, Michael Gestrin, Jan Huner, Gábor Hunya, J. Jegathesan, Rolf Jungnickel, June-Dong Kim, John M. Kline, Masamichi Kono, Mark Koulen, Sanjaya Lall, Ngo Van Lam, Robert Ley, Nick Mabey, Raymond Mataloni, Klaus E. Meyer, Manuel B. Montes, Peter Muchlinski, Lucia Piscitello, Sylvain Plasschaert, Maryse Robert, Pedro Roffe, Matija Rojec, Alan M. Rugman, Mitsuharu Sawaji, Sara Sievers, Carrie Smith, John M. Stopford, Simon Teitel, Shigeki Tejima, Raymond Vernon, Wee Kee Hwee, Ganeshan Wignaraja and Stephen Young. Numerous officials of central banks, statistical offices, investmentpromotion agencies and other government offices, as well as executives of a number of companies, also contributed to WIR98, especially through the provision of data and other information. The Report benefited from overall advice from John H. Dunning, Senior Economic Adviser.


Page Preface ........................................................................................................................................ ii Overview .............................................................................................................................. xvii I. GLOBAL TRENDS ...................................................................................................... 1
A. Overall trends ...................................................................................................................... 1 1. 2. International production ........................................................................................ 1 FDI flows .................................................................................................................. 7 (a) Inflows ........................................................................................................ 12 i. Developed countries and Central and Eastern Europe ............ 12 ii. Developing countries ..................................................................... 13 (b) Outflows ..................................................................................................... 18 Mergers and acquisitions ..................................................................................... 19


B. Inter-firm technology agreements .................................................................................... 23 1. 2. Developed countries ............................................................................................. 24 Developing countries ........................................................................................... 27

Notes .......................................................................................................................................... 31


A. The world’s 100 largest TNCs ....................................................................................... 35 1. 2. B. Highlights .............................................................................................................. 35 Degree of transnationality ................................................................................... 43

The largest TNCs from developing countries ............................................................. 47

Notes .......................................................................................................................................... 54


INVESTMENT POLICY ISSUES .......................................................................... 55
A. Trends ................................................................................................................................ 55 1. 2. B. National policies ................................................................................................... 55 Developments at the international level ............................................................ 59

Double taxation treaties ................................................................................................. 74


Tr World Investment Report 1998: Trends and Determinants

1. 2. 3. The role and characteristics of double taxation treaties .................................. 74 Effects of tax treaties ............................................................................................. 79 The universe of double taxation treaties ........................................................... 83

Notes .......................................................................................................................................... 87


COUNTRY HOST COUNTRY DETERMINANTS OF FOREIGN DIRECT INVESTMENT ....................................................................... 89
A. The national FDI policy framework ............................................................................. 92 1. 2. B. C. FDI policy as a determinant ................................................................................ 93 The impact of globalization ................................................................................. 97

Business facilitation ........................................................................................................ 99 Economic determinants ................................................................................................ 106 1. Traditional economic determinants .................................................................. 106 a. Natural resources .................................................................................... 106 b. National markets ..................................................................................... 107 c. Other traditional determinants.............................................................. 108 The impact of globalization ............................................................................... 108 a. Simple integration strategies ................................................................. 109 b. Complex integration strategies ............................................................... 111



The impact of international policy frameworks ....................................................... 117 1. 2. Bilateral investment treaties .............................................................................. 117 Regional integration frameworks ..................................................................... 118 a. The impact of regional integration frameworks on FDI determinants ..................................................................................... 120 (i) The policy framework ................................................................ 120 (ii) Economic determinants ............................................................... 121 (iii) Business facilitation ..................................................................... 123 The impact of regional integration frameworks on FDI flows ......... 124


Conclusion ........................................................................................................... 126 3. The potential impact of a possible multilateral framework on investment 128

Notes ........................................................................................................................................ 130



Annex to chapter IV. An econometric test of market related FDI variables ................. 135


DEVELOPED COUNTRIES ................................................................................... 141
A. B. C. United States .................................................................................................................. 141 Western Europe ............................................................................................................. 153 Japan ............................................................................................................................... 157

Notes ........................................................................................................................................ 161


AFRICA ...................................................................................................................... 163
A. B. Trends .............................................................................................................................. 163 Recent country success stories .................................................................................... 177 1. 2. Which countries are they? ................................................................................. 177 Why do they perform well? .............................................................................. 180 (a) (b) (c) The policy framework............................................................................. 180 Business facilitation ................................................................................. 183 Economic determinants .......................................................................... 184 i. Resource-seeking investment ..................................................... 185 ii. Market-seeking investment ........................................................ 185 iii. Efficiency-seeking FDI ................................................................. 188


Lessons ................................................................................................................. 189

Notes ........................................................................................................................................ 193


PACIFIC ASIA AND THE PACIFIC ...................................................................................... 197
A. B. Trends .............................................................................................................................. 197 The financial crisis in Asia and FDI ............................................................................ 208 1. Implications for FDI into the most affected economies ................................. 209 (a) (b) Effects on FDI entry and expansion ...................................................... 209 Effects on TNC operations ..................................................................... 211 i. Export-oriented FDI ..................................................................... 211 ii. Domestic-market-oriented FDI .................................................. 222 Regulatory changes affecting FDI ......................................................... 226



Tr World Investment Report 1998: Trends and Determinants

2. 3. 4. Implications for outward FDI ........................................................................... 227 Implications for FDI flows into other countries ............................................. 231 Conclusions ......................................................................................................... 236

Notes ........................................................................................................................................ 241

LATIN VIII. LATIN AMERICA AND THE CARIBBEAN ...................................................... 243
A. B. Trends .............................................................................................................................. 243 FDI, exports and the balance of payments ................................................................ 253 1. 2. 3. The export orientation of FDI ........................................................................... 254 Balance-of-payments concerns ......................................................................... 263 Conclusion ........................................................................................................... 268

Notes ........................................................................................................................................ 269


CENTRAL AND EASTERN EUROPE ................................................................. 271
A. Trends ................................................................................................................................. 271 B. Is Central and Eastern Europe attracting enough foreign direct investment? ..... 279 1. 2. The relative position of the region.................................................................... 279 Strengths and weaknesses ................................................................................. 284

Notes ........................................................................................................................................ 290

References ............................................................................................................................. 293 Annexes ................................................................................................................................. 313
Annex A. Additional text tables .......................................................................................... 314 Annex B. Statistical annex ................................................................................................... 351

Selected UNCTAD publications on Transnational Corporations UNCTAD Transnational and Foreign Direct Investment ......................................................................................... 425 Questionnaire ....................................................................................................................... 429

I.1 I.2 I.3 II.1 The volatility of foreign portfolio investment and FDI flows into developing countries ........... 14 Foreign portfolio investment: recent trends ....................................................................................... 17 The Nortel network ............................................................................................................................... 30 The international spread of banking ................................................................................................... 42



.......... 239 Brazil: the new champion ....................................................... 100 Incentives to attract FDI .................................................................................. 192 Is the current FDI boom in China over? ................... 113 Created assets ...................9 The degree of internationalization through FDI and through trade............................2 VII.............. 215 Toyota’s response to the Asian crisis: changes in production and exports from Thailand......................................... 265 Outward FDI in Slovenia .........................................7 I............................. 168 Africa as a location for market-seeking and efficiency-seeking FDI: the case of the ABC Bücherdienst GmbH in Namibia ..................................................................3 IV.................... 223 Prospects for inward FDI in various industries in the Republic of Korea ...........................1 VIII.......... 279 How high is the outward FDI stock of the Russian Federation? ................. 1994-1996 ...................................... 1996 ..........2 VIII..............8 I................................................................ 280 UNCTAD’s survey of investment-promotion agencies in Central and Eastern Europe .......................... 260 Argentina: two cases of investment in the petrochemical industry ...................... 9 FDI flows........................4 IX...............................................................................12 VII....................... 114 Knowledge-seeking FDI in R&D operations ...................... 14 FDI outflows by major region.................................................................................. relative to market size and population. 10 FDI inflows as percentage of gross fixed capital formation............................................................14 VIII.................1 V................................................. 116 Divestment .... 217 Implications of the financial crisis for foreign affiliates' operations: survey results for Thailand ................ 1997-1998 ... 1985-1997 ............................................................................ 222 The UNCTAD/ICC global survey: implications for FDI in Asia in the short and medium term .........................................................................................................................8 V........ 283 Investment incentives in the Czech Republic ............................................................................................................................................................6 I. 145 FDI in Mauritius ............................7 IV................... Inc.............................................. 202 FDI through offset programmes in West Asia ........................................ by region.................. 233 Policy measures .......................................................................4 I... 8 FDI inflows.1 VI.............1 I.................2 IX............................5 VII............................5 IV...10 VII........................ 18 The relationship between cross-border M&As and FDI flows... 187 The Southern Africa Initiative of German Business ..... 142 Indirect FDI .................... .. 13 Total private flows to developing countries............... by major region........... 248 FDI in the Caribbean Basin and the NAFTA challenge ....................................... restructuring and the Asian crisis: Seagate Technology..... 105 The continuing relevance of traditional determinants ...... by type of flow...................................6 VII...8 VII............................................................9 VII..Contents II................................................................3 VII................................. 43 Reviewing FDI in Canada .......................... 289 Figures I........................... 224 The Asian crisis and its implications for TNCs: the case of Motorola ...........................6 IV.................. 1980-1997 ............................................. 220 TNCs’ response to the crisis: the electrical and electronics industry in Malaysia ..... 220 The UNCTAD/ICC global survey ..................3 VIII................................... 212 TNCs........................................7 VII................... 225 Impact of the Asian financial crisis on Japanese FDI ........................................2 IV....................................................................................... 205 M&As and greenfield investment: a comparison ......................................................................4 IV..................4 Measurement of transnationality .... 1980-1997 ........................................................................ 7 Internationalization through FDI and through trade in selected countries and regions .........................................1 IX..... 1990-1997 ...............................1 IV................... 102 Ireland’s FDI policy ........................................................................5 I...........................13 VII.................................................. 94 Bilateral investment treaties: similarities and differences ......... 1980-1996 ............................. 1990-1997 ......3 VII......2 IV....2 VI................................................................................ 218 TNCs’ response to the Asian crisis: the case of Honda in Thailand ..............................................................................................................................................................................2 VI.....4 VII......................................1 VII............................................. 259 Trade by foreign affiliates in Argentina ..........................................2 I..........................11 VII................3 I............................... 19 ix ..................................................................................................................................................... 12 Capital flows to all developing countries....................... 93 The process of liberalization of FDI policies ...................................................3 IX.......

..........2 II.................. 41 Average transnationality index of the world's 100 largest TNCs.......................................... 1996 ...1980-1996 ....................................21 I..... 1993-1997 ........................ 1995-1996 .................10 II.............. 24 The share of the world's largest 100 firms in total inter-firm technology agreements...................................................................................................17 II...............4 II....... 52 Top 5 decreases in foreign employment among the top 50 TNCs from developing countries...................... by developing country firms and all firms............. 40 Top 5 increases in foreign employment among the world's top 100 TNCs..............16 I............................... 45 Average in transnationality index of the top 5 TNCs in each industry........................................ 25 Number of inter-firm technology agreements... 53 Top 5 rises in transnationality among the top 50 TNCs from developing countries..........25 II......... 1980-1996 ............................ 1983-1996 .................................. 46 Country breakdown of the top 50 TNCs from developing countries by number of entries for 1993 and 1996 ...............19 Cross-border and all M&As in the world ..................................... 28 Developing countries: number of inter-firm technology agreements........... 1980-1996 ........ 1995-1996 ........................................24 I.....................................................a 1995-1996 ........................ 20 Principal home countries of firms engaged in large cross-border M&As.................. 1995-1996 ....................................... 1998 ..18 I. 1995-1996 ....... 1980-1996 ........ by group of countries...................... 1995-1996 .................... 40 Top 5 decreases in foreign sales among the world's top 100 TNCs.............................13 II..... 1980-1996 ......17 I.............. 28 Industry profile of partnering activity in inter-firm technology agreements....11 II...................... 40 Top 5 increases in foreign sales among the world's top 100 TNCs................................................7 II........8 II. 41 Top 5 decreases in foreign employment among the world's top 100 TNCs....................................................................................................... 22 Sectoral distribution of cross-border M&As........... 1995-1996 .......... 51 Top 4 decreases in foreign assets among the top 50 TNCs from developing countries.........................15 II......................................19 I.......................... and M&As............. 1995-1996 ..................... 52 Top 5 decreases in foreign sales among the top 50 TNCs from developing countries.............................18 II.... 1995-1996 .......................13 I...................... 39 Top 5 increases in foreign assets among the world's top 100 TNCs. 1990 and 1996 ....... 1995-1996 .............. 51 Top 5 increases in foreign assets among the top 50 TNCs from developing countries......... 1990-1996 .................................................................................... 1995-1996 ..................... 1995-1996 ............ 52 Top 5 increases in foreign employment among the top 50 TNCs from developing countries........... 51 Top 5 increases in foreign sales among the top 50 TNCs from developing countries...3 II..... 1982-1996 .................... by selected industry.................. 29 The world's 100 largest TNCs: the five most important home countries...................Tr World Investment Report 1998: Trends and Determinants Page I............................................... 27 The portfolio of technology agreements of Toyota...................................................... 1995-1996 ........................................11 I..........................................15 I...................................... 21 Cross-border links among major TNCs in the automobile industry..14 I............................................5 II... 53 x .................................................. 1995-1997 ..................................23 I.............. 24 The evolution in the type of inter-firm technology agreements..........................................................................6 II........... 23 Inter-firm technology agreements.............................12 II........................................................................ 40 Top 5 decreases in foreign assets among the world's top 100 TNCs.................... 1995-1997 .............................. 1980-1996 ....9 II........................ 20 Major targeted industries in large cross-border M&As......16 II...... 21 Cross-border M&A sales and purchases................... 1989-1997 .......... 45 The top 5 falls in transnationality among the world's largest TNCs...... 1980-1996 .............22 I. 43 The top 5 rises in transnationality among the world's largest TNCs......................................... 25 The portfolio of technology agreements of Ford.....................20 I........ 28 Developing country firms and their partners in inter-firm technology agreements......... 1985-1996 .................... 1995-1996 ...........................12 I.................................. 23 The growth of inter-firm technology agreements...14 II.....10 I............. 1995-1996 .................1 II...........................

............................... 164 Africa: FDI flows as percentage of gross fixed capital formation...... 1989-1996 ........... 83 Number of countries and territories with DTTs..................................................................... 1996 ................................................................................................................... top 20 economies....................................................3 VI.20 III............... 206 Cross-border M&As as a percentage of FDI inflows................. 154 European Union........... 148 Developed countries: FDI stock as a percentage of GDP..... 55 BITs concluded in 1997......................... 1953-1998 .... 1997 .............1 VII.............7 VII.............. 86 The correlation between DTTs and BITs signed by countries............................................ 1996 ......4 VI...6 V............................ 85 DTTs concluded in 1997.............. 1996 ..... 1996-1997 ..................2 III............................................................... top 20 countries.............................................................7 xi ....................Contents Page II.......... 84 Number of DTTs concluded: top 20.........................................7 III....................... 176 Africa: FDI flows from the top 17 outward investor countries in 1997 and flows from the same countries in 1996 .. by sector........................................................................... 1997 and flows to the same economies...........6 VII....... 85 Average number of DTTs per country.............................. 1985-1997 ..... the United Kingdom and the United States in Africa...................... 207 FDI flows........................................................................................... 142 Developed countries: FDI outflows................... 166 FDI stock from France.............1 III............................................................................................ 1960-1997 ..................................................... 142 Developed countries: FDI flows as a percentage of gross fixed capital formation... by country group ............................................................................................................................... Germany................................... foreign portfolio equity flows and foreign bank lending to the Asian countries most affected by the financial crisis............................ 1996 ............................ intra-European Union and United States FDI outflows......... top 20 economies.1 V..... by country group ......3 VII........................ 1996-1997 ........ 1994-1996 ...... VII............. 163 Africa: FDI flows into the top 20 recipient countries in 1997 and flows to the same countries in 1996 ........................................................5......................4 III. 1960s-1990s .... 177 Asia and the Pacific: FDI flows into the top 20 recipient economies.... 206 Asia and the Pacific: FDI outflows from the top 15 economiesa in 1997 and flows from the same economies in 1996 .........1 VI...............................3 V..... top 20 countries......................2 Top 5 falls in transnationality among the top 50 TNCs from developing countries.... 171 Profitability of foreign affiliates of Japanese TNCs............. 86 Developed countries: FDI inflows....................................................................................... intra-European Union and United States FDI inflows.......... 1991-1997 ............ 1994-1997 ........................................... 152 European Union...... 1996 and 1997 ....9 V......................................................... by decade..............................................8 III.. 200 Asia and the Pacific: the relationship between cross-border M&As and FDI flows.................................. 53 Cumulative number of countries and territories with FDI laws.. 59 Cumulative number of DTTs and BITs.......................................... 1994-1996 (annual average) .....5 V...............................5 III........................... 1960-1997 ..5 VI.6 III............ 84 Number of intraregional DTTs....... 1995-1996 ............................... by region.. 198 Asia and the Pacific: FDI inflows and outflows as a percentage of gross fixed capital formation........ 199 Asia and the Pacific: inward and outward FDI stock as a percentage of GDP.. by selected host region. 143 Developed countries: growth of FDI........ 1960s-1990s .....2 VI..............................4 V............... 1989-1997 ................7 VI. by region and decade.................................... 1994-1996 .................................. 1960-1997 .. 165 Africa: FDI stock as a percentage of gross domestic product.6 VI........................... 1996 and 1997 .................. 1995 .............. 1985-1997 ... 208 VII...............................................3 III.................4 VII....2 V........ 156 FDI inflows to Africa............

.......... 236 Long-term prospects: overall response of companies worldwide ......26 VIII....................................................10 VII.......22 VII................................. 1992-1995 ............... top 20 economies................ cumulative flows............... by source region/country of investment............... 229 TNCs headquartered in the Republic of Korea: effects on outward FDI................. by home region.......13 VII....................... cumulative flows......17 VII...............16 VII.............23 VII........... by source region/country of investment................................... 227 Profits growth of world's largest 500 firms................................ 230 FDI in China....1 VIII..........3 VIII. 1996 ....................................................... 230 TNCs headquartered in the Republic of Korea: changes in investment intentions for 1998-1999 in the light of the crisis ........................................14 VII................................................................................................................................. 1996-1997 . 276 VII...... 1993-1996 .... 228 Cross border M&A purchases by firms headquartered in the countries most affected by the crisis...........6 IX...............8 Cross border M&A purchases in the five Asian countries most affected by the financial crisis..................................... by region/country of investment..............20 VII... 275 Central and Eastern Europe: FDI stock as a percentage of gross domestic product... by source region/country of investment. in selected countries of Latin America..................1 IX..................4 VIII...................11 VII.......................................... 1997-1998 (first half) . by region/country of investment. 1995/1996 ... cumulative flows..................... by region/country of investment.............. cumulative flows......................... survey responses............................. 232 FDI in Central Asia......25 VII..... 244 Latin America and the Caribbean: growth of FDI. 1996 ...... 1997-1998 ................................. by destination.. 250 Latin America and the Caribbean: FDI inflows by mode of entry........................................................................................ 1990-1997 ...................24 VII.............................................. 1996 .............. 1994-1996 (annual average) ...... 1997-1998 .. by region/country of investment........................................ 224 Developing Asia's outward FDI stock........... 1993-1996 .......................3 xii .............. by selected home economy......................................2 IX................... 1994-1996 (annual average) ........... 236 Central and Eastern Europe....... cumulative flows.............................................................................2 VIII. 236 FDI in Latin America and the Caribbean........... 1997-1998 ......................................... 232 FDI in South Asia by region/country of investment...................... 1997 and flows to the same economies................... 236 FDI in Africa.............................. 231 FDI in Viet Nam..................................Tr World Investment Report 1998: Trends and Determinants Page VII............ 211 Cross border M&A sales in the five Asian countries most affected by the financial crisis... March 1998 ....................................................... 211 Passenger car demand growth......... 1993-1996 ............. by host country.................... 1990-1996 ..................................... 1993-1996 .. 245 Latin America and the Caribbean: FDI flows as a percentage of gross fixed capital formation........................ top 20 economies.......................18 VII... 250 Central and Eastern Europe: FDI flows into the recipient economies..............................................21 VII......... 231 FDI in Asian LDCs......... 240 Long-term prospects: company intentions by home region of parent company ..........9 VII........ 240 Long-term prospects: company intentions by sector ...................... 246 Latin America and the Caribbean: FDI stock as a percentage of gross domestic product... cumulated flows 1993-1996 .....15 VII................................. 272 Central and Eastern Europe: FDI flows as a percentage of gross fixed capital formation.................................................19 VII..... 1979-1997 ........ cumulated flows 1993-1996 ..............................................12 VII....................................................................... 247 The Caribbean: FDI inflows by major host economies........................ cumulated flows.. 240 Latin America and the Caribbean: FDI flows into the top 20 recipient economies in 1997 and flows to the same economies in 1996 .................................................. top 20 economies......5 VIII................................ 1996 and 1997 .......

................. 1982-1997 ..9 II........................9 II.................................. 125 Growth rates of inward FDI flows.......5 I.......................... ranked by foreign assets..... ranked by foreign assets.................. 46 Averages in transnationality and foreign assets......... 57 Measures notified under Article 5.... 91 Share of the EEC (6) in United States' outward FDI stock .. 1996 ...... 50 Newcomers to the top 50 TNCs from developing countries... 1996 ...2 III......................................... 1983-1992 ................................. 6 China: Machinery imports and their share in total imports........................... 1996 ... 39 Industry composition of top 100 TNCs... 6 Germany................ 1995 and 1997 .5 IX.. 1996 ..................... 1996 ...... 1986 and 1996 ...... 276 Central and Eastern Europe: privatization-related FDI flows as percentage of total FDI inflows..... 1990 and 1996 ...........................................................6 Central and Eastern Europe: stock of inward FDI............... 46 The top 50 TNCs from developing countries ranked by foreign assets...................6 I................... Japan and United States: receipts from patents...................... by country/group of countries............................... ranked by foreign assets...........5 II............................ by industry...........................1 II... by type......8 I..........4 III..................................000 GDP and FDI flows per capita.... 1985.............. 59 Host country determinants of FDI .......................3 Selected indicators of FDI and international production......... 11 The world’s top 100 TNCs...............................................2 I............................................................ 1991-1997 ...........11 II.....................1 III........ 45 Transnationality index for small and large home economies.....................3 III................................. 1996 ...........7 II...5 IV..................................................................... 1996 ................................. 1990.................................... 48 The top 5 TNCs from developing countries in terms of degree of transnationality...................... 50 Snapshot of the top 50 TNCs from developing countries...3 II................. 57 National regulatory changes and their distribution.. 2 Number of parent corporations and foreign affiliates............................ FDI flows per $1......... 1982-1997 ............ 1994-1997 ..... 1998 . 1996 ........................ EEC (9) member countries........................ 53 Industry composition of top 50 TNCs from developing countries in 1993 and 1996 ............................. latest available year . 1996 ..6 II..................... 277 Central and Eastern Europe: FDI flows from the economies in 1997 and flows from the same economies in 1996 ..... 1996 ........ 1996 ..........2 IV.. 39 Snapshot of the world’s 100 largest TNCs.... 125 xiii .. June 1998 ....15 III..... 1993 and 1997 .... by type of enterprise.. 1990 and 1996 ............. 58 Export processing zones and free zones..4 I.......13 II............ 1996 ..12 II............................ by industry............................ 3 Regional distribution of inward and outward FDI stock..........................4 II....... 1986-1997 .. by area and economy............................. 5 Importance of production by foreign affiliates...... 36 Newcomers to the world’s top 100 TNCs......................................Contents Page IX..............................................3 I... 50 Averages among the top 50 TNCs from developing countries in transnationality............. 54 Countries and territories with special FDI regimes..........................................14 II............................. 9 The world’s largest host and home economies for FDI flows.. 5 Indicators of production by foreign affiliates.................................... 7 Regional distribution of FDI inflows and outflows............. 1997 .....1 I.............. 50 Departures from the top 50 list of TNCs from developing countries.................. royalties and licence fees........................ 1993-1997 ....... 39 Departures from the world’s top 100 TNCs............... 1996 ..................................................... 56 National regulatory changes............................................................... 1996 ......................1 of the TRIMs Agreement................ by region........10 II....................2 II..................................... 278 Tables I....4 IX............................7 I............. 41 The world’s top 10 TNCs in terms of degree of transnationality. 1993-1997 ...............1 IV..................8 II....................

............... real GDP per capita........ selected indicators.. VI................................................. VI.... Regressions of nominal inward FDI flow on nominal GDP.........................................10 Africa: average annual growth rates of real GDP............................. IV................... 1997 ... VII......... and real GDP per capita...5 Number of foreign branches of major Japanese banks. current growth in real GDP.................. Regression of nominal inward stock of FDI on nominal GDP................Tr World Investment Report 1998: Trends and Determinants Page IV.............. IV...........1 FDI inflows into the Asian countries most affected by the financial crisis........4 The investor friendliness of the FDI regulatory framework in Africa: rankings according to several indicators.................. developing countries .................................. 1996 in recent FDI frontrunner countries and all countries .................................................................. and residuals from inward FDI stock equations .................................... 1991-1997 and GDP (current prices)......first quarter of 1998 ................ 1990 and 1995 ..................... employment and capital expenditures of United States TNCs...............................................11 FDI inflows into Ghana by sector and industry..3 Privatization transactions involving foreign investors in Africa.... 1996 ..................... VI.A... V............1................................................................... V........................ IV...........8 Africa: selected indicators of macroeconomic stability for recent FDI frontrunner countries and averages for all Africa .............................................5 African members of the World Association of Investment Promotion Agencies (WAIPA).1 United States: FDI inward and outward flows... V...........A.............. by region and by industry........... 1987-1991 and 1992-1996 .................................. past growth in real GDP.......... current growth in real GDP..............................2............................7 Regressions of nominal inward flow of FDI on nominal GDP.............................. past growth in real GDP. growth in real GDP.............................. and real GDP per capita ............. 1982 and 1995 . VI..1 FDI flows into the least developed countries in Africa.......................6 Rates of return on United States FDI in Africa and selected regions....................... developing countries ................. VI....4 Japanese outward FDI on a notification basis.....................A. 135 137 137 138 138 139 139 149 151 153 159 160 167 170 172 173 174 176 179 181 182 186 186 189 201 xiv .......... current growth in real GDP....... VI..................... V..........3 United States: share of parent companies in gross product.......2 The major home countries for FDI flows into Africa............... real GDP per capita.....................................6 Regression of nominal inward stock of FDI on nominal GDP.....4 Regression of nominal inward stock of FDI on nominal GDP......... 1997 . 1982-1996 ........................12 Africa: selected indicators of the level of education and infrastructure facilities in recent FDI frontrunner countries and for all countries ......2 United States: R&D expenditure per employee in foreign affiliates and parent firms........................................ and real GDP per capita for a smaller group of countries ............. V........................................ real GDP per capita................ 1995-1997 ......................... 1985-1997 .................... and political stability developing countries ....................................A..... and residuals from inward FDI stock equations.. 1997 and 2000 ...................................................... VI................. past growth in real GDP........ Regression of nominal inward FDI stock on nominal GDP.... and residuals from inward FDI stock equations and political stability................... 1995-1997 ..........................A........ 1987-1991 and 1992-1996 ................... VI.........A............... developing countries ..3.......9 Africa: total real trade as a share of GDP and indicators of trade barriers in recent FDI frontrunner countries and other African countries ...5 Regression of nominal inward stock of FDI on nominal GDP....................... VI................................A................... 1983-1997 ........ VI........................... IV.. real GDP per capita.. 1990.................. VI................ IV.......7 Africa: Recent FDI frontrunners by selected indicators............... VI. IV..........

...............3 VIII... Republic of Korea: major elements of the FDI promotion programme ....... Selected indicators of the importance of inward FDI............... relative to import of goods of parent companies from affiliates. Short.................................. by industry.. Central and Eastern Europe: selected indicators of the importance of inward FDI......................................6 VII.4 VIII.................... Central and Eastern Europe: share in world inward FDI stock and flows.........................................8 IX..... compared by respondents with other regions............ Central and Eastern Europe: relative importance of foreign-owned companies in manufacturing.......... by sales........ compared with shares in population..8 IX.......7 VIII....... 1997 ........... 1985-1996 . 210 216 226 235 237 238 249 251 254 256 257 VIII.......... Latin America and the Caribbean: export propensity of the top 100 companies in Latin America in selected countries.....................9 IX.......... Latin America and the Caribbean: exports of goods of United States parent companies to affiliates in Latin America...................... 1995-1997 .. Latin America and the Caribbean: export propensities of United States majority-owned foreign affiliates in manufacturing.............................5 IX................................................................................................... 1994 and 1996 ......... 1997 ..... fall in share prices and interest rate changes in the most affected economies...........7 IX............................. Central and Eastern Europe: factors enhancing or constraining inward FDI..... 1998-2002 ........................... GDP and imports ................................................5 VII.......................................................... 1985-1996 ...................................................................3 IX..........................................February 1998 .. 1996 .... 1990s ... Central and Eastern Europe: average annual rates of growth of inward FDI and gross domestic product....................................7 VIII.........................................................................................................2 VIII.......... July 1997 .......................6 IX......................6 266 267 268 273 274 274 277 281 281 282 284 285 286 288 VIII........................... Summary of effects of the crisis and possible implications for FDI in the short and medium term in and from countries affected by the crisis ....10 IX.... 1993-1997 ............ by sector. 1993-1997 .............1 IX..... 1990-1996 ........... 1989 and 1995 .... Latin America and the Caribbean: FDI in terms of types of corporate strategies............................................ Central and Eastern Europe: sectoral and industrial distribution of inward FDI stock in selected countries...................5 Currency depreciation......... the United States and the European Union......... Latin America and the Caribbean: payments of royalties and licence fees by Latin American host countries........... Export propensity of Japanese and United States affiliates in the Asian countries most affected by the financial crisis..2 IX........... Central and Eastern Europe: geographical distribution of inward FDI stock in selected countries............ 1996 ........... Latin America: the 20 biggest foreign affiliates...................... FDI inflows in selected Latin American countries............................... 1983-1995 ......................4 IX.................................................................and medium-term investment intentions of the world's leading TNCs in the light of the Asian crisis..3 VII. Central and Eastern Europe: factors expected to enhance inward FDI... by country .......2 VII..........11 xv ........................................... Central and Eastern Europe: inward FDI performance........................1 VIII.. Latin America and the Caribbean: payments of direct investment income by Latin American host countries..............Contents Page VII. 1998 ....................................... by sector of activity and company status............................................................ The share of Asian developing countries in FDI in Japan.................................... by region.............. 1996 .. 1995 .......................4 VII........ 1997 ....... by host region ......... Central and Eastern Europe: survey responses with respect to degree of success in terms of attracting and absorbing FDI......

Tr World Investment Report 1998: Trends and Determinants xvi .

and $9. attributed to some 53. the value of international production. suggesting that the expansion of international production has deepened the interdependence of the world economy beyond that achieved by international trade alone.5 trillion as measured by the accumulated stock of FDI. while outflows reached $424 billion.000 TNCs and their 450.VERVIEW OVERVIEW Foreign direct record strengthening Foreign direct investment set a new record in 1997. Sales of foreign affiliates have grown faster than world exports of goods and services. and GDP attributed to foreign affiliates accounts for 7 per cent of global GDP. is estimated to have increased by $1. their global assets $13 trillion. The capital base of international production in 1997. The upward trend in investment flows supported further the expansion in international production. production Worldwide foreign direct investment (FDI) inflows continued their upward climb in 1997 for the seventh consecutive year. These figures are also impressive when related to the size of the global economy: the ratio of inward plus outward FDI stocks to global GDP is now 21 per cent. they increased by 19 per cent to a new record level of $400 billion.. foreign affiliate exports are one-third of world exports. was $3. Seemingly unaffected by the Asian financial crisis. expanding and strengthening international production worldwide.. In 1997.5 trillion as measured by the estimated global sales of foreign affiliates. . including capital for direct investment purposes drawn from sources other than transnational corporations (TNCs). Other indicators also point in the same direction: global exports by foreign affiliates are now some $2 trillion.000 foreign affiliates. and the ratio of the volume of world inward plus outward FDI stocks to world GDP has grown twice as fast as the ratio of world imports and exports to world GDP.6 trillion in 1997. and the global value added by them more than $2 trillion.

chemicals and pharmaceuticals. dominate the global picture. The ranking of TNCs by the different transnationality indexes also differs: although General Electric tops the list of the largest 100 TNCs ranked by the size of foreign assets. The world’s 100 largest TNCs show a high degree of transnationality as measured by the shares of foreign assets. the value of the index for the top 50 developing country TNCs has been increasing steadily throughout the 1990s. it did not change significantly between 1990 and 1995. with telecommunications. while food and beverages. Outflows from the European Union were $180 billion in 1997. Continued strong economic growth in the United States. but their dominance is being eroded. accounting for more than one-fifth of global inflows. and invested $115 billion abroad during the year. in contrast. While the value of the index for the top 100 TNCs is higher. The impressive numbers documenting the growth of international production disguise considerable variation across and within regions. construction and trading being the most transnational in the case of the top 50 developing country TNCs. Not surprisingly. Seagram ranks first in the composite index of transnationality. firms at the top of the composite transnationality index are from countries with small domestic markets. and electronics and electrical equipment were the most transnational among the world’s top 100. but Orient Overseas International ranked first in the composite index of transnationality. The transnationality index of the former was 35 per cent in 1996. Among the countries of the European Union. The United States received $91 billion in inflows. there are significant differences by type of industry. Naturally.. to $233 billion). foreign sales and foreign employment in their total assets. while that of the latter was 55 per cent.. In contrast. sales and employment. The top 50 TNCs headquartered in developing countries are catching up rapidly. with the 100 lar gest TNCs in the world having become highly largest largest transnationalized and the 50 largest developing country TNCs catching up. and the mergers-and-acquisitions (M&As) boom are the principal reasons for the acceleration of inflows to developed countries in 1997 (an increase of almost a fifth over 1996. for the second successive year. It is in flows of inward FDI that developing countries have made the biggest gains over the 1990s.. with more than two-thirds of the world inward FDI stock and 90 per cent of the outward stock.. the United Kingdom received $37 billion (just under a tenth per cent of global inflows) in 1997. There is no doubt that the developed countries. and a renewed interest in European integration prompted by the expected advent of the Euro in 1999 led to a spurt in the share xviii . with their values as well as shares of global inflows increasing markedly: from $34 billion in 1990 (17 per cent of global inflows) to $149 billion in 1997 (37 per cent of global inflows).Tr World Investment Report 1998: Trends and Determinants . improved economic performance in many Western European countries. Daewoo Corporation topped the list of the 50 largest developing country TNCs by foreign assets. The composite index that combines all three shares bears this out: the top 50 TNCs headquartered in developing countries have built up their foreign assets almost seven times faster than the world’s top 100 TNCs between 1993 and 1996 in their efforts to transnationalize. strong …despite the strong investment performance of developed countries in 1997. Developing countries accounted for nearly a third of the global inward FDI stock in 1997. Developing countries continue to be major players in FDI inflows. Likewise. increasing from one-fifth in 1990. transport. Germany registered net FDI withdrawals.

it is not surprising that inter-firm agreements are prominent in knowledge-intensive industries. Worldwide cross-border M&As. more recently. though still low compared to other developed economies. on the average. Such agreements are particularly important for enhancing the technological competitiveness of firms and their number has increased from an annual average of less than 300 in the early 1980s to over 600 in the mid-1990s. In that year one BIT was concluded. France and Germany.513 at the end of 1997. New liberalization measures were particularly evident in industries like telecommunications. majority-owned M&As represented nearly three-fifths of global FDI inflows in 1997. During 1997 alone. The United States. totalling 1. developed countries accounted for about 90 per cent of the worldwide majority-owned M&A purchases. insurance. Given their emphasis on technology or joint R&D development. . in automobiles. in telecommunications). A subset of such agreements involves technology-related activities and is a response to the increased knowledge-intensity of production. TNCs are achieving their goals of strategic positioning or restructuring not only through M&As but also through inter-firm agreements. mostly in banking. The network of bilateral investment treaties (BITs) is expanding as well. Valued at $236 billion. The number of double taxation treaties also increased. and invested $26 billion abroad. 89 per cent of them in the direction of creating a more favourable environment for FDI. chemicals. Japan received $3 billion in 1997. were aimed at the global restructuring or strategic positioning of firms in these industries and experienced another surge in 1997. with 108 concluded in 1997 alone. are efforts create Countries are continuing their efforts to create favourable conditions for FDI. pharmaceuticals and telecommunications. every two-and-a-half days.. followed by the United Kingdom. treaties regional with bilateral treaties and regional initiatives gaining momentum. xix . Many of the 1997 M&A deals have been large and 58 of them were each worth more than $1 billion. the shortening of product cycles and the need to keep up with the constantly advancing technological frontier. New promotional measures included streamlining approval procedures and developing special trade and investment zones (adding to the many such zones already in existence).794 at the end of 1997. Together. or strengthened existing ones. These deals are not only a major driver of FDI flows for developed countries. usually TNCs. These strategies have been made possible by liberalization (including the WTO’s financial services agreement in 1997) and deregulation (e. An estimated 8. increasing from almost a half in 1996.260 inter-firm agreements in technology-intensive activities have been concluded between 1980 and 1996.. numbering 1. but also shed light on the prevailing strategies of TNCs: divesting non-core activities and strengthening competitive advantages through acquisitions in core activities. The common thread that runs through the proliferation of both types of treaties is that they reflect the growing role of FDI in the world economy and the desire of countries to facilitate it. During 1997.g. a record figure. One outcome is a greater industrial concentration in the hands of a few firms in each industry.Overview of investment directed to member countries. 36 countries introduced new investment incentives. accounted for the biggest share of the large M&A deals. broadcasting and energy that used to be closed to foreign investors. 151 changes in FDI regulatory regimes were made by 76 countries. such as the information industry and pharmaceuticals and.

legally binding commitments. Partly reflecting this situation. be it at the bilateral. intended to incorporate a comprehensive framework of rights and obligations with respect to investment. the approach of the ASEAN Investment Area is different from that of other regional initiatives in that it emphasizes policy flexibility. the FTAA will consolidate and integrate the various free trade and investment areas already present in the region. Unlike other net resource flows such as official development assistance or some other types of private capital. regional or multilateral level.Tr World Investment Report 1998: Trends and Determinants Discussions of regional initiatives are taking place in most regions in the context of new or existing agreements. FDI inflows increased in 1997. East and xx . when pressures grew to make them more transparent and to initiate a broad-based public debate on FDI issues. In pursuing this objective. A new record level of $45 billion in FDI flows received by China contributed to the 9 per cent increase in total FDI flows to Asia and the Pacific in 1997. UNCTAD. at least for now.. If successful. with no developing region experiencing a decline in the level of inflows. cooperative endeavours and strategic alliances and avoids. have been launched. is seeking to help developing countries participate effectively in international discussions and negotiations on FDI.. on the other hand. On the American continent. Although smaller than those of developed countries.. The work of the WTO Working Group on the Relationship between Trade and Investment is focusing on the economic relationship between trade and investment.. In Asia. and issues relevant to assessing the need for possible future initiatives. such as portfolio equity investment. and for over a half of the developing-country FDI stock. been taking place mainly in the WTO and UNCTAD. . Wide-ranging discussions at the multilateral level have. negotiations on the Free Trade Agreement of the Americas (FTAA). meanwhile. Foreign direct remained source relative Foreign direct investment has remained a source of relative stability in capital flows to developing countries. existing international arrangements and initiatives on trade and investment. . Asia and the Pacific accounts for nearly three-fifths of the FDI inflows received by all developing countries. the increases in 1997 in FDI flows into developing countries are noteworthy because they took place in an environment that presented a complex mix of adverse changes. resilience … showing resilience in the face of the financial crisis in Asia and the Pacific. the ASEAN Investment Area is scheduled to be established later this year. With $87 billion in 1997. The ongoing negotiations on a Multilateral Agreement on Investment at the OECD reached a critical point in 1998 after two years of negotiations. a pause for reflection until October 1998 was agreed to by the OECD ministers. the implications of the relationship for development and economic growth. UNCTAD is paying special attention to identifying the interests of developing countries and ensuring that the development dimension is understood and adequately addressed in international investment agreements. broad-based …as governments engage in broad-based and wide-ranging discussions on agreements international investment agreements and their development implications. However. In Africa. there are preliminary discussions on new regional initiatives on investment in the context of the Southern African Development Community (SADC) and the Organization of African States.

Philippines. Malaysia and Thailand had a much lower profile. European TNCs. the subregion most affected by the financial crisis in Asia during the second half of the year. M&As are gaining in importance as a mode of investment in Asia and the Pacific. The rate of increase of FDI inflows declined to 11 per cent in 1997 from an average of 147 per cent between 1992 and 1993. the most important question relating to foreign investment is how the crisis and its xxi . which constrict their outward flows to China. FDI approvals have fallen from $111 billion in 1993 to $52 billion in 1997.stricken by the financial crisis in the second half of 1997.6 billion in 1997. With inflows totalling $2. TNCs from the Republic of Korea. The region’s FDI pattern is also characterized by an increasing share of FDI received by the services sector..9 billion in 1997. while firms from Singapore and Taiwan Province of China were actively involved in acquisitions of firms in crisis-afflicted countries. with an outward stock of $137. China. as a number of their FDI expansion projects were scaled down or put on hold.Indonesia. currency depreciations in other economies that are eroding the price competitiveness of foreign affiliate exports. affected . excess capacity in several industries due to overinvestment or weaker demand conditions. The expectation of a decline is based on several aspects of the national and regional economy: a slowdown in economic growth from its exceptional performance of the past few years. The FDI pattern emerging in Asia and the Pacific is characterized by a decline in intraregional investment. China and Indonesia experienced large increases in outflows. are now taking an active interest in the region.. While these considerations suggest an impending decline in FDI flows to China. as many of the region’s TNCs grapple with mounting debts and other difficulties.Overview South-East Asia. Japan. now in its sixth consecutive year. Finally. and adverse economic conditions in its biggest FDI source economies in Asia (Hong Kong. also saw a small increase of 6 per cent to $82. The five Asian economies most affected by the crisis saw their combined FDI inflows remain at a level almost unchanged from that in 1996. foreign-investor participation in the restructuring of state-owned enterprises and a continued strong growth performance compared with other countries in the region could yet mitigate the expected drop.5 billion in 1997. Furthermore. For Asia. massive infrastructure building. poor infrastructure in the interior provinces that hinders investment in low-wage activities. the Republic of Korea. with big projects in naturalresource-seeking investments. although the implications of the crisis for FDI in the most affected countries are are a matter for concern. largely concentrated in oil-producing Kazakhstan and Azerbaijan. Thailand and the Republic of Korea -. FDI outflows from Asia and the Pacific increased by 9 per cent in 1997 to $50. Malaysia and Thailand). Central Asia has become a more important destination for FDI than West Asia. ongoing FDI liberalization. and especially the five Asian countries -. having largely neglected Asia until recently. China. On the other hand. partly because of liberalization but also in direct response to efforts by some host countries to become regional investment hubs. The biggest investor is Hong Kong. which received $1. is showing signs of coming to an end.7 billion.4 billion in 1997 but this trend is unlikely to continue in 1998. China’s current FDI boom. Malaysia. partly in response to corporate restructuring in the countries directly affected by the financial crisis. wage increases in the coastal areas that are eroding its locational advantage in low-cost labour-intensive investments.

neither FDI flows nor the activities of foreign affiliates in the region. give rise to concerns over the loss of national control over enterprises. can take advantage of their corporate systems of integrated international production to strengthen their export orientation substantially.. can remain impervious to the changes that the crisis has set in motion. these need to be taken seriously.. This is especially relevant for export-oriented FDI and there are already signs that investors are responding to the changes in the relative costs of production. the crisis and its aftermath have changed a number of factors that influence FDI and TNC operations in the affected countries. This is not surprising given that FDI is investment made with a long-term interest in production in host countries. especially in the short and medium term. TNCs in the affected Asian economies. effects are increasing While some effects of the crisis are conducive to increasing inward FDI.while production for export by foreign affiliates already well established in both Thailand and Malaysia seems to be increasing. the availability of firms seeking capital and the liberalization of policy with respect to M&As makes the entry of foreign investors through the acquisition of assets easier than before. however. remaining positive and continuing to add to the capital stock of the affected countries while other capital flows. A second factor conducive to increasing FDI in the most affected Asian countries is the improvement in their international cost competitiveness due to devaluations. Western Europe and less affected economies in the region have taken the opportunity to invest in the crisis-affected countries.Tr World Investment Report 1998: Trends and Determinants economic consequences will affect inward FDI in the short and medium term. in particular in the five most affected countries. Indeed. One is the decrease for foreign investors in the costs of acquiring assets whose prices have fallen. opening new areas and relaxing rules. Firms interested in strategic positioning in Asia and the Pacific or seeking created assets to complement their worldwide portfolio of locational assets might find it attractive to establish or expand operations in these countries at the present time. including in the context of IMF adjustment programmes. have further liberalized their FDI regimes. FDI in export-oriented industries (such as electrical and electronics manufacturing) has risen in Thailand -. In addition. which are already highly export-oriented in certain industries. so as to avoid a backlash.as it had in Mexico after the Peso crisis -. The increasing importance of M&As as a mode of entry may. fell sharply and even turned negative in 1997 as a whole. most of which already have fairly liberal frameworks for FDI. All this makes it easier for TNCs to enter or expand their operations at the present time. Governments in the countries most affected by the crisis. including bank lending and portfolio equity investment. especially in Thailand and the Republic of Korea. in order to enhance the competitive positions of TNCs. Nevertheless. The potential positive impact of both lower asset prices and decreased operational costs on inward FDI could be enhanced by the liberalization moves and promotional efforts that are being made by the affected countries. at least in the short and medium term. . if they can afford to take a long-term view of the market prospects in the region or if they produce for export rather than domestic or regional markets. Some of the changes are actually conducive to increasing FDI flows to the affected countries. FDI plays an important role in the region and could thus assist the countries in the process of their economic recovery. xxii . There is evidence that firms from the United States. They have also intensified their efforts to attract FDI both individually and collectively. FDI flows to the region have been quite resilient in the face of the crisis.

depend heavily on FDI from other developing Asian countries and inward FDI flows to them could decrease because of a decrease in outward FDI from the countries affected by the crisis. on balance. FDI to countries not seriously caught up in the crisis may also decline. The impact of these factors is further compounded for some TNCs by a credit crunch at home and difficulties in raising funds abroad. For firms focused on domestic or regional markets. some countries may also lose export competitiveness vis-à-vis the countries that have devalued. reduced demand and slower growth can be expected to lead to some cancelling. most importantly. postponed or even cancelled investment projects in some of these countries. The implications of the financial crisis for inward FDI are also likely to extend to other. are likely to experience lower economic growth. It is difficult to predict how the various factors set in motion by the crisis will affect. Foreign affiliates in the services sector are particularly susceptible to local demand conditions.... although long-term prospects remain sound. On the other hand.Overview . business facilitation and. but flows decreased from all the five crisisaffected countries except Indonesia. overall outward FDI from developing Asian economies rose. especially those with close economic links to the countries most affected by the crisis. However. but much depends on the extent to which the financial crisis spills over into the real sector. Viet Nam and the least developed countries of the region.. in which TNCs figure prominently in the region. scaling down or postponement of FDI in the most affected countries.making it difficult to predict the overall impact on FDI in the region in the prospects remain short and medium term. developing countries in Asia.. For one thing. some countries. difficult predict region . Aside from that.. These factors could reduce their attractiveness as host countries. boosting exports and increasing domestic sourcing.. and reduced profitability of operations due to contraction of demand. some consequences of the crisis will affect FDI adversely in the short and medium term. many Asian developing countries.. is a good example of the impact of the crisis and the range of responses: a number of automotive TNCs have scaled down. . and most importantly.. because of the non-tradability of most services. The crisis is likely to reduce the financial capacities of Asian TNCs (including TNCs from Japan) to undertake FDI on account of valuation losses. including injecting funds to help their financially distressed affiliates and subcontractors. economic xxiii . The automotive industry. Despite their overall resilience. Furthermore. affect adversely. flows to the affected countries and to the region as a whole may well fall in 1998. inward FDI to the crisis-stricken countries and to the region as a whole in the short and medium term.mainly because of decreased outward FDI from some Asian home countries. decreased from . others will affect it adversely. In 1997. the impact on domestically-oriented foreign affiliates varies among industries. . firms have also adopted various other measures to cope with the crisis. given that the FDI determinants proper -. increased debt burdens on foreign-currency denominated loans. at least in the short run. Affiliates producing goods and services that depend mainly on imported raw materials and intermediate inputs would be more seriously affected than those relying on domestic sources. less seriously affected..regulatory frameworks.. including China. relocating parts production.

there is room for cautious optimism. surpassing Mexico with $12 billion and Argentina with $6 billion. the extent to which these various factors translate into actual flows will depend on the assessment by TNCs of the long-term prospects of the region in the context of their own strategies for enhancing competitiveness. These same features suggest not only that longer-term FDI prospects for the region remain positive. the United States is still the largest investor in Latin America and the Caribbean. is almost exclusively geared to international markets. but that they may even improve as countries strengthen certain aspects of their economies in response to the crisis. deregulation and regionalization. MERCOSUR has given a boost to both intraregional and extraregional FDI.. especially as far as market-seeking FDI is concerned. Despite the growing role of Asian and intraregional FDI. growth. Structural reforms. TNCs will be reluctant to invest. . regions growth. mostly geared to national markets. economic stability. has given rise to some exports in certain tradable services and may have increased xxiv . with the United States market being the final destination of exports. with its investment in the region reaching $24 billion in 1997. and cautious in acquiring assets in the region. Services FDI. Primary-sector FDI. Apart from sustained economic growth and good macroeconomic performance. FDI flows to Asia will continue on their upward trend without serious interruption. With more than $16 billion in inflows. as witnessed by the sizeable contributions of TNCs to the region’s exports and by increases in the export propensity of United States manufacturing affiliates. macroeconomic stabilization and adequate macroeconomic management have also contributed to the export performance of foreign affiliates and domestic firms.. there are some signs that TNC activities in Latin America have become more export-oriented. most of the manufacturing FDI in Mexico and the Caribbean Basin has been efficiency-seeking. growth.an increase of 28 per cent over 1996 -. and that the changes resulting from the crisis have positive as well as negative implications for FDI. Global competition and market expansion are prompting TNCs from Europe. In contrast. electronics. mostly in automobiles. particularly in automobiles and chemicals.and invested a record $9 billion abroad.are attractive. still important in a number of countries. The increase in inflows accounted for two-thirds of the overall increase in inflows to all developing countries. If their assessment is negative. Government policy has also played a crucial role in generating the conditions under which the current FDI boom in Latin America and the Caribbean has occurred. First. the United States and Asia to invest in the growing MERCOSUR market. wide-ranging privatization.Tr World Investment Report 1998: Trends and Determinants determinants of long-term growth -. key factors in the region’s FDI boom were trade liberalization. due to stability. liberalization and privatization. The turnaround in FDI flows to Latin America and the Caribbean that occurred in the early 1990s was further strengthened in 1997: the region received $56 billion -. Latin America’s strong FDI performance has been accompanied by changes in the nature of the investment it receives. privatization programmes have provided opportunities for expansion for both market-seeking and resource-seeking TNCs. In the services and primary sectors. Brazil emerged as the region's champion in 1997. Latin America now tops developing regions in inward FDI growth. apparel and other manufacturing. However. The rationale for the latter view is that the fundamental features of the region as a destination for FDI remain sound. If they take a positive view and take advantage of the crisis to position themselves strategically in the region.

especially as import growth normalizes once the adjustment of foreign investors to the new policy environment is completed.in the case of Tunisia -. almost threefifths of FDI flows from the major home countries of TNCs in Africa -. the strengthened export orientation of foreign affiliates should help to improve current account imbalances. Mozambique. While Africa trails other developing regions in attracting FDI. While natural resources are an important determinant for FDI flows into most of these countries. the United Kingdom and the United States -. In 1997. a group of seven countries -.Botswana. The lion’s share of export creation by foreign affiliates has taken place in manufacturing. the continent remains a highly profitable investment location as companies receive rates of return on their investments that by far exceed those in other developing regions.stand out in terms of relative FDI inflows and their growth during 1992-1996.2 billion during 1994-1996 compared to an average of $3. which can be most clearly observed in Mexico and the Caribbean Basin. access to large regional markets. and if complementary policies to strengthen domestic capabilities and linkages are also pursued. 44 per cent more than in 1996. reviving concerns over a negative balance-of-payments impact. however. not only in comparison to other African countries but also to developing countries as a whole. almost the same as in 1996.conditions encouraging the location of export-oriented. Tunisia and Uganda -. FDI in Central and Eastern Europe has bounced back. in response to the trend towards integrating manufacturing affiliates into global production networks.2 billion during 1991-1993. Africa’s remained unremarkable …but Africa’s performance has remained unremarkable – with some exceptions. efficiency-seeking FDI in the country also play a role. The recent FDI boom in Latin America has also been accompanied by large and rising current-account deficits. Germany. but also of final consumer goods. Equatorial Guinea. This turnaround xxv . What all these “frontrunner” countries have in common is significant progress in improving their regulatory FDI frameworks as well as significant progress in strengthening political and macroeconomic stability. A number of other factors. if TNCs begin by establishing sales affiliates and distribution networks. Ghana. FDI flows to Africa have stabilized at a significantly higher level than at the beginning of the 1990s: an average of $5. they are by no means the only explanation for their relative success in attracting FDI. Judging by data for United States and Japanese affiliates in Africa. including fast-growing national markets. Namibia. Most of them have also stepped up efforts to create an FDI-friendly business climate. In addition.have gone into manufacturing and services since 1989. suggesting that the widely held assumption that Africa receives FDI only on the basis of natural resources is mistaken. inflows were $4. The immediate effects of trade liberalization on the balance of payments may well be negative because FDI tends to generate higher imports not only of capital and intermediate goods.7 billion. Central and Eastern European economies broke their stagnating FDI trend in 1997 -the first year the region as a whole registered a positive GDP growth rate in recent years -by receiving record FDI flows of $19 billion. significant privatization programmes and -.Overview exports indirectly through services-related activities of manufacturing operations.France. In the longer run. particularly through investment promotion activities.

are The principal determinants of the location of FDI are the policy framework. and the characteristics of their economies. mainly in natural resources and infrastructure development. changes in FDI policies have an asymmetric impact on the location of FDI: changes in the direction of greater openness may allow firms to establish themselves in a particular location. Despite this turnaround. and privatization efforts. through intra-firm rather than arm’s-length transactions. nationalizations). The contents of both rings differ from country to country. Complementing core FDI policies are other policies that affect foreign investors’ locational decisions directly or indirectly. most of the FDI growth occurred in manufacturing and services..Tr World Investment Report 1998: Trends and Determinants took place after a decline of 10 per cent in 1996. In general.e. however. Policies that affect FDI but have not been designed for that purpose constitute the “outer ring” of the policy framework. remains uneven..g. with the Russian Federation as the leading outward investor. a necessary but not sufficient determinant of FDI relatively location is becoming relatively less important with liberalization and globalization . Different motives. but they do not guarantee this. xxvi . measures business facilitation measures and economic factors. a long transition-related recession and a lack of experience in FDI facilitation measures. These include trade policy and privatization policy. standards of treatment of foreign affiliates and the functioning of markets. this is explained by the fact that the majority of the countries opened up to inward FDI fairly recently. In contrast. The FDI pattern. the industry in question. To a large extent. The Russian Federation was the leading recipient. The relative importance of different location-specific FDI determinants depends on the motive and type of investment. as well as over time. The core enabling framework for FDI consists of rules and regulations governing entry and operations of foreign investors. changes in the direction of less openness. the proactive measures countries adopt to promote and facilitate investment. To explain the differences in FDI performance among countries and to ascertain why firms invest where they do. by influencing the effectiveness of FDI policies. reflecting the diverse experiences of countries in the transition to market-based economies. As for outflows. FDI takes place when firms combine their ownership-specific advantages with the location-specific advantages of host countries through internalization.8 per cent in 1997. and the size and strategy of the investor. i. Central and Eastern Europe’s share in world inward FDI stock is still low: 1. it is necessary to understand how TNCs choose investment locations. the strengthening of regulatory and institutional frameworks relevant for TNC operations. sufficient The FDI policy framework. for example. can translate into different location patterns depending on the investor ’s strategy. Policies designed to influence the location of FDI constitute the “inner ring” of the policy framework. Three broad factors determine where TNCs invest: the policies of host countries. outflows from Central and Eastern Europe more than tripled in 1997. their accumulated FDI stocks are therefore small. Core FDI policies are important because FDI will simply not take place where it is forbidden. However. especially if radical (e. will pretty much ensure a reduction in FDI. The small stock also reflects the influence of various obstacles such as problems in the legal and regulatory frameworks. In the other Central and Eastern European economies.

quality and geographical pattern of FDI flows must be tentative and could range from scenarios that see no or very little impact. If a possible MFI should lock in unilateral liberalization measures. it would enhance the FDI enabling xxvii . Since an MFI is a hypothetical policy determinant. Another outcome is that countries are increasingly paying more attention to the inner and outer rings of the policy framework for FDI. One outcome is a relative loss in effectiveness of FDI policies in the competition for investment: adequate core FDI policies are now simply taken for granted. especially the joint coherence of FDI and trade policies.and outer-ring policies becomes more difficult to draw as the requirements of international production make higher demands on the efficacy of the policy and organizational framework within which FDI policies are implemented.would underscore the importance of the principal economic determinants and business facilitation measures in influencing location in a globalizing world economy. stability and predictability. Regional integration frameworks may cover a wide spectrum of integration measures. assure greater protection. in the case of developed countries. ranging from tariff reduction among members to policy harmonization on many fronts. an overwhelming majority of countries have introduced measures to liberalize FDI frameworks. this may happen even before regional integration becomes a fact. This is particularly important for efficiency-seeking FDI as firms integrate their foreign affiliates into international corporate networks. fiscal and exchange-rate policies) as well as a variety of macro-organizational policies become increasingly relevant. be understood that the implications of the various scenarios would vary from country to country in accordance with specific economic and developmental conditions and specific national stances vis-à-vis FDI. the precise impact of a possible MFI would depend on the form it takes. The key issue for inner-ring policies is policy coherence.if it were to be negotiated and if it were to lead to more similar FDI policy frameworks -. the boundary line between inner. moreover. With developing countries. macroeconomic policies (which include monetary. In fact. As the core FDI policies become similar across countries as part of the global trend towards investment liberalization. At the same time. and particularly whether it would merely lock in the FDI liberalization process or further encourage it. and create pressures for (or even lead to) further liberalization. to a negative or positive impact. assessments of its possible impact on the actual quantity. A multilateral framework on investment (MFI) -. such membership can be regarded as an economic determinant in its own right. transparency. Foreign investors assess a country’s investment climate not only in terms of FDI policies per se but also in terms of macroeconomic and macroorganizational policies. The inner rings for both inward and outward FDI tend to become similar. because of this effect. however. Globalization and FDI liberalization have exerted mutually reinforcing pressures on each other and the momentum for neither has subsided. Thus. with positive effects on inward investment. the inner and outer rings of policies gains more influence. This has provided TNCs with an ever-increasing choice of locations and has made them more selective and demanding as regards other locational determinants. Among the policy measures that can have a direct effect on FDI is membership in regional integration frameworks.Overview Since the mid-1980s. membership in a regional integration scheme usually requires at least some degree of FDI (or capital movement) policy harmonization. it must. Even on the policy front. as these can change a key economic determinant: market size and perhaps market growth.

it is also conceivable that if an MFI was of a “stand-still” type. The importance of this determinant per se has not declined but the importance of the primary sector in world output has declined. Among these measures. should therefore not be exaggerated. incentives. In addition.especially the possible role of such an agreement in providing a framework for intergovernmental cooperation in the area of investment -. in absolute terms or relative to the size and income of the population. even though this involves high human capital and other costs. increasingly targeting individual investors. Historically. There are. know-how and infrastructure required for their extraction and sale to the rest of the world.. They include investment promotion. Furthermore. National market size. it would not create a more liberal policy framework than the one that already exists. it was relatively easy to distinguish the type of FDI corresponding to each of these motives. often state-owned. corresponding to the principal motives for investing abroad: resource (or-asset)-seeking. if there were to be one. the most important category of determinants. the availability of natural resources has been the most important FDI determinant for countries lacking the capital. after-investment services can be singled out because of the importance of reinvested earnings in overall investment flows and because satisfied investors are the best advertisement of a country’s business climate. In the past.Tr World Investment Report 1998: Trends and Determinants policy framework and could lead to more investment -..if the other FDI determinants were in place. enterprises have emerged in developing countries with the capital and skills to extract and trade natural resources. while business facilitation measures are becoming relatively more important. its impact on FDI determinants and flows would be difficult to detect. improvements in amenities and measures that reduce the “hassle costs” of doing business. measures are relatively more . although the value of FDI in natural resources has far from declined. economic factors assert themselves as locational determinants. relative The relative importance of economic determinants. Expectations about the impact of a possible MFI -. However. business facilitation measures have become more sophisticated. they have proliferated as a means of competing for FDI as FDI policies converge towards greater openness.. Large markets can accommodate more firms and allow each of them to reap xxviii . large indigenous.if indeed it were to be negotiated -. market-seeking and efficiencyseeking. While these measures are not new.on FDI flows in comparison to the current regulatory framework and the direction in which it is developing.. Once an enabling FDI policy framework is in place.but these fall outside the scope of the present analysis which is specifically focussed on the determinants of FDI. after-investment services. of course. Financial or fiscal incentives are also used to attract investors even though they typically only enter location-decision processes when other principal determinants are in place. has been another important traditional determinant. . and hence. These changes mean that TNC participation in natural resource extraction is taking place more through non-equity arrangements and less through FDI. other issues that would need to be considered in connection with a possible MFI -. It is in the context of a greater similarity of investment policies at all levels that business facilitation measures enter the picture. leading to market-seeking investment. They fall into three clusters. skills.

insurance and most infrastructural services. characterized by strong links between foreign affiliates and parent firms. However. as TNCs increasingly relying increasingly pursue competitiveness-enhancing strategies relying on a portfolio of locational assets.. FDI and technology flows. combined with deregulation and privatization. Although this type of FDI is not new. driven by cost-price competition and. . At the same time. as labour costs declined in xxix . technological advances have enhanced the ability of firms to coordinate their expanded international production networks in their quest for increased competitiveness. which were sheltered from international competition by tariff barriers and quotas. Largely immobile low-cost labour was another traditional economic determinant of FDI location. All of these factors are changing the relative importance of different economic determinants of FDI location. The traditional motives for FDI have not disappeared either. The traditional determinants have not disappeared.one of the principal reasons why regional integration frameworks can lead to more FDI. as well as links between TNCs and unrelated firms via non-equity arrangements. especially for labour-intensive activities.Overview the benefits of scale and scope economies -. Costs feature prominently. they are becoming relatively less important in FDI location decisions. unskilled labour becomes the principal locational determinant. …is changing under the impact of liberalization and globalization. Large national markets were also important for those services whose non-tradability made FDI the only mode of delivery to consumers. Technology and innovation have become critical to competitiveness. that matters. Much of the inward FDI of the 1960s and 1970s was drawn by large national markets for manufacturing products. but host country markets do not: it is access to international markets. Under simple integration strategies. the removal of trade (and FDI) barriers in an increasing number of countries and technological advances that permit quick changes in product specifications in response to changes in demand. Openness to trade. The forces driving globalization are also changing the ways in which TNCs pursue their objectives for investing abroad. to simple integration strategies. more importantly. they are being incorporated into different strategies pursued by firms in their transnationalization process. was initially small because FDI frameworks for services were typically restrictive. Such investment. More and more firms are therefore developing a portfolio of locational assets to complement their own competitive strengths when they engage in FDI.. based on largely autonomous foreign affiliates. it began to prosper under the conditions of globalization. excluding foreign investors in many fields such as banking. privileged or otherwise. rather. High market growth rates stimulate investment by foreign as well as domestic investors. Much of the investment in export processing zones and labour-intensive industries has been in response to simple integration strategies. forcing firms to seek new markets and resources overseas. however. particularly important for efficiency-seeking investment. These have evolved from the traditional stand-alone strategies. Complementing it are other determinants. such as the reliability of the labour supply and adequate physical infrastructure for the export of final products. as witnessed by the growing number of firms that are becoming transnational. have improved firms’ access to markets for goods and services and to immobile factors of production and have increased competitive pressures in previously protected home markets.

When it comes to the economic determinants. firms that undertake competitivenessenhancing FDI seek not only cost reduction and bigger market shares. splitting up the production process into specific activities or functions and carrying out each of them in the most suitable. and that are further enhanced by a range of business facilitation measures. as distinct from natural resources. As services became more tradable. they are “created assets”. the new configuration also includes agglomeration economies arising from the clustering of economic activity. the dividing line between is becoming increasingly blurred. countries had to offer additional locational advantages over and above the availability of low-cost unskilled labour to attract FDI. but also access to technology and innovative capacity. These resources. Complex integration strategies can involve.Tr World Investment Report 1998: Trends and Determinants relation to total production costs and as FDI in response to simple integration strategies became more mobile. Possessing such assets is critical for firms’ competitiveness in a globalizing economy. TNCs undertaking such FDI take for granted the presence of state-of-the-art FDI frameworks that provide them with the freedom to operate internationally. countries that develop such assets become more attractive to TNCs. as well as good infrastructure facilities. particularly in their labour-intensive intermediate production stages such as data entry. Productivity and some level of skill. infrastructure facilities. gained in importance as locational determinants for this type of investment. where profitable. this contributed to the upgrading of the locational advantages that countries could offer to TNCs pursuing simple integration strategies. are people-made. More than ever in the past. competitive pricing of relevant resources and facilities. Consequently. Losing such access could mean losing this type of investment. … which strategies give rise to a new configuration of locational determinants. complex integration strategies allow TNCs that pursue them to maximize the competitiveness of their corporate systems as a whole on international portfolio of location assets. The challenge is precisely to develop a well-calibrated and preferably unique combination of determinants of FDI location. finally. To attract such competitiveness-enhancing FDI. growing “created with a growing emphasis on “created assets”. TNCs strategies are evolving from simple to complex integration. With more and more TNC intermediate products and functions becoming amenable to FDI. access to regional markets and. that are complemented by the relevant bilateral and international agreements. Access to international markets also became more important. In the process. it is no longer sufficient for host countries to possess a single locational determinant. The locational advantages sought by such service TNCs included computer literacy and a reliable telecommunication infrastructure. In addition. and to seek to match xxx . in their efforts to attract the more sophisticated activities that TNCs were now locating abroad. One implication for host countries wishing to attract TNCs undertaking competitiveness-enhancing FDI is that created assets can be developed by host countries and influenced by governments. Again. It is precisely the rise in the importance of created assets that is the single most important shift among the economic determinants of FDI location in a liberalizing and globalizing world economy. This contributed to the efforts of many developing countries seeking to gain permanent access to the markets of developed countries through trade agreements or regional integration arrangements. costcompetitive location. they too began to relocate abroad in response to simple integration strategies.

Thus. the trend towards increased flows of FDI world-wide and the creation of a more hospitable environment for FDI continues. Even the Asian financial crisis does not seem. by becoming commonplace. liberal national policy frameworks have lost some of their traditional power to attract foreign investment. August 1998 Rubens Ricupero Secretary-General of UNCTAD xxxi . Liberalization has proceeded at the international level through the proliferation of bilateral treaties and the creation of new regional markets and investment areas. One of the peculiar consequences of recent developments in the FDI area is that. What is more likely to be critical in the years to come is the distinctive combination of locational advantages -. Also important are other policies that encourage the strengthening of created assets and the development of clusters based on them as well as policies that stimulate partnering and networking among domestic and foreign firms and allow national firms to upgrade themselves in the interest of national growth and development.Overview those determinants with the strategies pursued by competitiveness-enhancing TNCs. thus far. It must be remembered too that created assets also enhance the competitiveness of national firms. infrastructure. to have greatly affected either FDI inflows to. * * * All in all. or the further liberalization of FDI policies in developing countries. market access and the created assets of technology and innovative capacity -. Geneva.including human resources.that a country or region can offer potential investors. policies aimed at strengthening innovation systems and encouraging the diffusion of technology are central because they underpin the ability to create assets.

Tr World Investment Report 1998: Trends and Determinants xxxii .

rose by over 10 per cent in 1997. sales.can be gauged from estimates of the worldwide FDI stock.2 It is held by a minimum of 53. which constitutes the capital base for TNC operations. Overall trends 1. reflecting the fact that. It then examines recent trends in inter-firm agreements as these are assuming increasing importance in certain industries.2). 1996a). all major indicators (table I. in the past. This chapter examines trends and developments with respect to various aspects of this phenomenon. though there are some noticeable recent 1 . gross product and exports of these firms.3 and B.5 trillion (annex tables B. Subsequent chapters deal with the largest TNCs undertaking FDI (chapter II).000 TNCs -. It begins by focusing on trends in the size and pattern of international production as indicated by world foreigndirect-investment (FDI) stock. measures of foreign-affiliate operations.large and small (table I. world FDI stock. most FDI originated and stayed in developed countries. assets.1) related to FDI and TNC activities showed higher rates of growth in 1997 (as in 1996) than did GDP and exports. International production The size and distribution of international production by TNCs -.4).and hence their role in the world economy -. A. The regional distribution of outward FDI stock is heavily skewed towards developed countries. More specifically. to reach an estimated $3. 1 Indeed. Subsequent chapters also contain more detailed analyses of the regional trends that are only sketched here (chapters V-IX).Chapter I CHAPTER I GLOBAL GLOBAL TRENDS International production by transnational corporations (TNCs) continues to grow in importance for both developed and developing countries. and the flows of FDI that contribute to the building up of international production capacity. developments in the policy framework within which they operate (chapter III) and the host country characteristics that determine where they invest (chapter IV). compensating for the decline in growth during 1991-1995 that reflected the recession of the early 1990s (UNCTAD.

0 d 3 3 8 1 11 3 3 9 2 12 Memorandum: GDP at factor cost Gross fixed capital formation Royalties and fees receipts Expor ts of goods and non-factor services Source: a b c d 28 822 5 136 53 6 245 30551 5393 61 6432 UNCTAD.3 The relative stagnation in the average size of assets owned by foreign affiliates worldwide suggests that more and more firms.5 2. Projection on the basis of 1995 figures.7 45.9 14. The regional distribution of inward FDI stock is approaching that of FDI inflows. The average assets of large foreign affiliates of United States TNCs were $132 million for 1995. the average size of assets owned by foreign affiliates worldwide in the mid-1990s was about $28 million. The share of South. as they refer to fixed assets and intangible assets that are used for production purposes and to financial assets that entitle the firms to receive income.5 6.2). not included in this table are the values of worldwide sales by foreign affiliates associated with their parent firms through non-equity relationships and the sales of the parent firms themselves. These assets indicate the capacity of foreign affiliates to produce goods and services. gross product and total assets of foreign affiliates are estimated by extrapolating the worldwide data of foreign affiliates of TNCs from France. But even if the number of foreign affiliates (large and small) should be close to 1 million. Estimates. Note: 2 .6 12.8 -0. however. including small and medium-sized enterprises and firms from developing countries. The role that they play in host countries has become more and more important. are establishing foreign affiliates of modest size. with 30 per cent of the total being in developing countries in 1997.0 c 6. (Billions of dollars and percentage) Item FDI inflows FDI outflows FDI inward stock FDI outward stock Cross-border M&As a Sales of foreign affiliates Gross product of foreign affiliates Total assets of foreign affiliates Value at current prices (Billion dollars) 1996 1997 338 333 065 115 163 851 c 950 c 156 c 400 424 456 541 236 500 c 100 c 606 c d d d d Annual growth rate (Per cent) 1986-1990 1991-1995 1996 23.9 1997 18. up from $88 million in 1990 (United States.6 27.3). Germany.1 12.1.7 10.3 12.5 times as large as FDI stocks because a good part of them are financed by local loans and local shareholders as well as by finance raised in third markets (table I.6 27. Tab le I. Japan and the United States (for sales). Department of Commerce.7 c 13. because the number of foreign affiliates worldwide is probably understated considerably by available data (table I.9 1. 1993b and 1997a). Worldwide sales.0 d 3.1 12. Assets held by all foreign affiliates in 1997 were 3. based on FDI/TNC database and UNCTAD estimates.4 8.1).0 c 0. Majority-held investments only.2 24.2 21. the average size of foreign affiliates would still be $12 million.7 13. 1987-1990 only. this could be an overestimation of the size of foreign affiliates in terms of assets.3 c 7.1 15.5 21.2 7.0 c 7.0 d 15.4 6. 1986-1997 able indicators production. Selected indicator s of FDI and international production.0 d 5. almost comparable to their size at the beginning of the 1990s.0 b 16.7 c 12.5 15.0 21.6 20. Italy.5 12. Judging by available data.6 18.1 9.2).1 8.4 5.2 2.1 18.3 30.2 11.Tr World Investment Report 1998: Trends and Determinants increases in the stock of developing countries (table I. East and South-East Asia in world inward FDI stock nearly doubled during the past decade (table I.3 16.3).2 13. There are at least 448.9 -0. those from the United States (for gross product) and those from Germany and the United States (for assets) on the basis of the shares of those countries in the worldwide inward FDI stock.000 foreign affiliates in the world and in all likelihood many more (table I.

China India Indonesia Korea. .. . 10 u .... East and South-East Asia China Hong Kong. 30 2 1 109 b .. 302 . 1 482 70 1 300 112 6 242 379 500 187 313 4 806 57 .. . 39 966 1 608 1 350 822 4 148 1 059 b Area/economy Developed De veloped economies Europe W estern Europe European European Union Austria Belgium Denmark Finland France Germany Greece Ireland Italy Netherlands Por tugal Spain Sweden United Kingdom j Europe Other W estern Europe Iceland Norway Switzerland Japan United States developed Other de veloped Australia Canada New Zealand South Africa Developing De veloping economies Africa Ethiopia Swaziland Zambia Latin America and the Caribbean Bolivia Brazil Chile Colombia El Salvador Guatemala Mexico Paraguay Peru Uruguay Developing Europe De veloping Eur ope Croatia Slovenia Former Yugoslavia South. .Chapter I able foreign by economy available year Tab le I.. 797 s .. b y area and economy. ... Number of parent corporations and foreign affiliates... . 3 . Republic of Pakistan Philippines Singapore Sri Lanka ab Taiwan Province of China Thailand Year Foreign affiliates located in economy a 96 620 63 789 54 2 2 2 1 9 11 1 1 2 5 6 5 2 875 362 000 012 200 351 445 798 040 630 259 809 809 551 609 d c e f g h i k h l 5 456 b 50 900 4 506 4 231 m 3 379 o 2 530 485 1 695 232 q 118 9 323 b 8 914 40 3 100 5 774 3 014 n 18 901 p 10 2 4 1 2 916 371 541 949 q 055 230 696 330 21 r 134 175 21 174 257 6 322 2 028 t 2220 225 287 8 420 109 1 183 v 123 6 045 353 1 792 3 900 1998 1996 1997 1996 1995 1995 1995 1990 1985 1993 1995 1997 1997 1997 1996 1991 1997 1997 1995 1995 1996 1993 1995 1995 1995 1990 1992 32 . b w x x y 199 145 5 1 3 3 14 18 5 1 469 000 067 416 472 z 878 758 802 aa 154 139 733 050 /.. latest a v ailab le y ear (Number) Parent corporations based in economy a 43 442 b 33 302 1996 1996 1997 1996 1996 1996 1991 1994 1995 1993 1997 1997 1997 1996 1995 1996 1995 1996 1995 1997 1996 1997 1996 27 846 897 1 110 5 000 1 200 2 078 7 569 .2... ..

034 non-bank parent companies.161 non-bank foreign affiliates. As of May 1995. as definitions change. Estimated by Banque Nationale de Belgique. Number of firms with foreign capital. Represents a total of 12. Represents 448 foreign affiliates in banking and 2. are based on the register of companies held for inquiries on United Kingdom FDI abroad. Of this number. Includes firms controlled by a foreign direct investor. which may consist of a number of individual companies.. Less than 10. equity ownership by non-resident corporations and/or non-resident individuals. Does not include holding companies abroad that are dependent on German-owned capital and that. and the number of foreign affiliates in the United Kingdom. 811 are majority-owned foreign affiliates . insurance and real estate industries in December 1992 (272). Note: 4 . latest available year (continued) (Number) Area/economy W est Asia Bahrain Oman Saudi Arabia Turkey Central Asia Kyrgyzstan Pacific The Pacific Fiji Europe Central and Eastern Eur ope Albania Belarus Bulgaria Czech Republic Estonia Hungary Lithuania Poland Romania Russian Federation Slovakia Ukraine World Year 1995 1995 1989 1995 1997 1997 1997 1994 1994 1997 1998 1994 1997 1997 1998 1994 1997 1994 Parent corporations based in economy a 449 b . hold participating interests of more than 20 per cent abroad (indirect German participating interests). Includes joint ventures with local firms. Deviations from the definition adopted in the World Investment Repor t (see section on "definitions and sources" in annex B of this Repor t) are noted below. 1. Data on the number of parent companies based in the United Kingdom. as defined by that economy. Each parent company represents a fully consolidated United States business enter prise. This number covers all firms with foreign equity. 66 12 58 s 20 s . sales and net income under $1 million. Represents a total of 2.Tr World Investment Report 1998: Trends and Determinants able foreign by economy available year (continued) Table I. as data become available for countries that had not been covered before. or as older data are updated.. sales or net income exceeded $1 million. registered with the Securities Exchange Commission from 1989 to 1995. The number of parent companies not including finance. The number of affiliates established during December 1990-Feburary 1998. 92 z . Does not include the number of foreign-owned holding companies in Germany which. Includes joint ventures. 26 660 . hold par ticipating interests in Germany (indirect foreign participating interests).517 are majority-owned foreign affiliates.. and 534 United States affiliates that are depositary institutions. The number of foreign affiliates not including finance. Represents the number of foreign affiliates that received permission to invest during 1992-May 1998. which may consist of a number of individual companies. Data are for the number of investment projects. Number of foreign companies registred under DL600.959) plus the number of parent companies in finance.679 are are fully owned foreign affiliates.551 bank and nonbank affiliates in 1992 with assets. The number of firms that are registered with the National Bank of Kyrgyz Republic.816 bank and non-bank affiliates in 1994 whose assets.610 non-bank parent companies in 1995 and 60 bank parent companies in 1994 with at least one foreign affiliate whose assets. As of May 1998. The numbers are probably understated because of the lags in identifying investment in greenfield sites and because some companies with a small presence in the United Kingdom and abroad have not yet been identified. while 159 affiliates have less than 10 per cent equity share. . a b c d e f g h i j k l m n o p q r s t u v w x y z aa ab ac ad ae af ag ah ai Represents the number of parent companies/foreign affiliates in the economy shown. As of October 1993. 53 607 Foreign affiliates located in economy a 2 486 538 351 z 1 461 136 1 041 1 041 ad 151 151 12 1601 1 280 393 918 44 062 3 170 15 205 1 624 32 889 6 193 7 793 5 560 2 514 448 917 ae af ag ah ai Source: UNCTAD estimates. and FDI into the United Kingdom conducted by the Central Statistical Office.2. the data can vary significantly from preceding years. Includes both Danish and foreign parent corporations in Denmark. Of this number. The number of firms that are registered with the National Bank of Kyrgyz Republic. insurance and real estate industries in March 1996 (3. As of October 1993. in turn... . by area and economy. Each affiliate represents a fully consolidated United States business enter prise. The actual number of firms that are in operation was 3. Represents a total of 25 bank parent companies and 1. i. in turn. Only registered affiliates with the Estonian Commercial Register..730) plus the number of foreign affiliates in insurance and real estate industries in November 1995 (284). and 5. sales or net income exceeded $3 million. As of March 1997. 357 9 9 ac 842 b . insurance and real estate industries in March 1996 (2. Number of parent corporations and foreign affiliates. .. The actual number of firms that are in operation was 387. sales and net income under $3 million. As of 1994. and 709 non-bank and bank parent companies in 1994 whose affiliate(s) had assets. Includes data for only the countries shown below.e. As of 1989. Of this number 21.. As of 1991.

1 0.7 0.2 1.7 3.3 7.0 36.1 0.4.7 .4 trillion in (Billions of dollars) the same year (tables I.6 8.3 4. as it is distributed in the form of wages (income of employees). Regional distribution of inwar d and outwar d FDI stoc k.1 1. Ministry of International Trade and Industry.9 6.4 45.2 0.2 15. worldwide production-related data are estimated by extrapolating the worldwide data of foreign affiliates of TNCs from Germany and the United States (for assets). sales per affiliate in 1995 were $100 1993 7 132 5 975 1 371 1 278 1994 8 361 6 624 1 574 1 455 million for United States foreign affiliates 1995 9 957 8 346 1 810 1 961 and $110 million for Japanese foreign 1996 a 11 156 8 851 1 950 .2 2.1 0. Note: 5 . firms Gross product Exports of use FDI more than they use exports -. Foreign affiliates Projection on the basis of the 1995 figures.9 25. If assets indicate the potential level of production.to service foreign markets..3 0.3 2.7 0.3 100 Outward FDI stock 1990 1995 95. 1998a).8 100 1985 95. 1989 4 520 4 788 1 160 947 1990 5 625 5 204 1 394 1 149 although there is considerable variation in 1991 4 162 5 052 1 422 977 size of sales by home country. Japan and the United States (for sales).3 2. Tab le I.1 and I.1 45.9 10.6 31.9 0.6 20.7 22. 1983 1 885 2 395 547 569 affiliates relative to world exports is 1984 1 965 2 632 573 680 increasing: during the early 1980s the ratio 1985 2 272 2 533 604 698 of sales of foreign affiliates to world exports 1986 2 878 2 842 755 694 1987 3 403 3 519 846 740 was 1. 1995 and 1997 (Percentage) Inward FDI stock 1990 1995 79. a The real contribution of enterprises to an economy can be measured by gross product or value added.9 0.1 10.6 39.5 25.4 0.. the importance of sales by foreign 1982 1 869 2 440 559 .8 20. 8.1. turnover or sales indicate the use to which assets have been put.4 0.by a Year Assets Sales (Value added) foreign affiliates factor of 1.2 50.2 0.1 1.3 5.7 2.1 41. Department of a 1997 12 606 9 500 2 100 .5 1. 1997a.8 46.2.1 14..5 8. 1982-1997 services.3 20. Commerce.0 100 1997 90.0 8.6 50.3 0.8 36.5 1. profits (income of firms) and taxes (income of governments).6 27.1 13.7 0..2 1.8 4.6 100 91.0 30. Sales of goods and services by foreign affiliates -.1 100 Region/country Developed De veloped countries Western Europe European Union Other Western Europe United States Japan Developing De veloping countries Africa Latin America and the Caribbean Developing Europe Asia West Asia Central Asia South.9 1.1 2. Italy.3 25.1 5. 1985.3 0. based on annex tables B.9 1.6 2.5 trillion in 1997 -.5 51.9 0.3 and B.2 28. those from the United States (for gross product) and those from Japan and the United States (for exports) on the basis of the shares of these countries in the worldwide inward FDI stock.3 33.6 3. 1990.1 11.3 6.2 100 World Source: UNCTAD.3.3 0.7 0.6 2. and in 1990 it was 1.6 0.4 40.4 0.an estimated $9.2 100 1997 68.4 Source : UNCTAD estimates.5 0.4). Thus.8 .1 2. Indicator s of production by f oreign rate than worldwide exports of goods and affiliates.Chapter I able distribution inward outward stock. East and South-East Asia The Pacific Europe Central and Eastern Europe 1985 72. Sales per 1988 4 027 4 180 1 017 891 affiliate worldwide are about $20 million. Indeed. Germany.4 0.1 15.4 0.1 5.2 7.are growing at a faster able Indicators production by foreign Tab le I.1 2.4 2.3 24.9 0.9 34.1 100 70.5 -.5 11.6 2.4 4.4.1 10.. Thus.1 0.3 44. 8. affiliates (United States.1 36. for 1992 6 300 5 325 1 411 1 241 example.0 9. Japan. which amounted to $6.5 2.7 44.1 17.6 8.4 6. those from France.

6 26.0 23. 1988 and 1998. 5 Since the mid-1980s.9 Exports of all foreign affiliates as percentage of world exports b . accounting for between 52 per cent for Japan to 95 per cent for Germany (table I.6. compared to about one-quarter during the latter half of the 1980s. Transnational linkages between firms have become more important in acquiring and upgrading technology over the years because foreign affiliates have. although in all cases the proportion of capital goods in total imports has declined (table I.1 6. Impor tance of pr oduction b y foreign affiliates.7).1 5. Deutsche Bundesbank. able Germany from ro fees.. Receipts and payments of royalties the share of the United States in the worldwide inward FDI stock.2 5. German y.3 21. Year 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 Export propensity of foreign affiliates c . Region World of which intra-firm (per cent) Developed countries.2 6. foreign affiliates -. r o yalties and licence f ees. access to their parent companies’ R&D facilities and indeed to those of their entire corporate networks.5 24.of the volume of technology basis of the shares of these countries in the worldwide inward FDI stock. Source : UNCTAD estimates.3 .7 26. for example. export data are adjusted to flows by TNCs.0 5.. able Importance production by foreign Tab le I..4 21.5 22.. 6 ..7 31.9 28. the ratio of exports to total sales) has remained close to one-quarter in 1995 (table I.5 . at double-digit rates (table I. 8 . 2 908 . Foreign affiliates can also contribute to the host economy through exports. . Bank of Japan. In the case of China.. 1986 and 1996 (Millions of dollars) 1986 Japan 1 230 58 . Technology transfers are another a Worldwide value added is estimated by extrapolating the worldwide value aspect of the cross-border activities of added of foreign affiliates of TNCs from the United States on the basis of TNCs.3 23.5). c Share of exports of foreign affiliates in total sales of foreign affiliates.1) and intra6 firm transactions are predominant. 1996 Japan a 6 443 52 3 525 . as compared to 5 per cent in the mid-1980s (table I. Their value is increasing exclude those of wholesale affiliates to avoid possible double counting.3 27. Japan and United States: receipts fr om patents. 1992 and 1997d. 1989 and 1998a. 23..0 21. 1982-1997 (Percentage) Value added of all foreign affiliates as percentage of world GDP a 5.7 28.. . In calculating expor ts of Japanese affiliates.5).9 26. They also accounted for an increasing share in world GDP: close to 7 per cent in 1997.5 4.8 5. the export propensity of foreign affiliates (i.4 22. . Fiscal year 1995.7 6.. of which intra-firm (per cent) Central and Eastern Europe of which intra-firm (per cent) Germany 778 92 671 92 74 93 33 94 United States 7 927 76 6 861 78 647 55 13 - Germany 2 453 95 1 971 94 415 97 68 94 United States 29 974 79 23 246 82 5 051 68 127 74 Source: a UNCTAD. 1987 and 1997 and Ministry of International Trade and Industry. of which intra-firm (per cent) Developing countries. Technology can also be acquired through the import of capital goods. at least in principle. Department of Commerce. b Worldwide expor ts are estimated by extrapolating the worldwide expor ts and licence fees are a measure -.8 22. They are estimated to have accounted for some one-third of world exports in 1995 (table I..performed quite well in this respect compared with domestic firms as a group.. based on Japan.3 19.1 19. .5).e.4 6.3 32...5. and United States.Tr World Investment Report 1998: Trends and Determinants worldwide generated more than $2 trillion in value added in 1997 (table I.6 25.4).7 25.6 27. .3 6.6).3 5.5 31. .and especially joint ventures -.3 5.2 5. .7 6. Tab le I..8 27. 27..however of foreign affiliates of TNCs from Japan and the United States on the imperfect -.8 6.

7 . based on Inter national Tr ade Centre UNCTAD/WTO world GDP has remained ChinaTraders database. it can now also be measured Foreign affiliates 8 988 26 9 679 14 Fully foreign-owned firms 1 607 18 3 383 12 by FDI flows and stocks. China: Mac hiner y impor ts and their share in total able Machiner imports hinery economic integration among imports. by enterprise. The degree of internationalization thr ough FDI and through trade . but not steadily Other 264 13 8 1 (figure I. Despite different and divergent performances in different regions reflecting these developments. Statistics Department of relatively constant during the the Customs General Administration. through through trade.3 and table I. 1980-1996 (Percentage of GDP) Source : Note: UNCTAD. of course. weak commodity and petroleum prices that affected the economies of Africa and West Asia.9) as well as in the pace at which FDI is growing.8). the scales used for the three panels are different.2). the worst economic recession in Japan since the mid-1970s. impor ts.1.1). Thus. 2. continued high economic growth in the United States. strong economic recovery in the European Union and Latin America. FDI/TNC database. FDI flows The year 1997 witnessed a complex mix of economic changes around the world (UNCTAD. during the past decade and a half. FDI continued to grow in all regions (figure I. noteworthy differences in the pace of integration among regions and countries (figure I. 1998a): the financial crisis in Asia and the halting of high economic growth in East and South-East Asia. provided by China. For the Equity joint ventures 7 381 29 6 296 16 world as a whole. 1993 and 1997 (Millions of dollars and percentage) countries has traditionally been measured by the relative 1993 1997 importance of international trade Value of Share in Value of Share in imports total imports imports total imports at the national. and the reversal of economic decline in Central and Eastern Europe for the first time since the end of central planning. same period (figure I. There are. regional or global Enterprise levels.1). The ratio of world Total 18 282 18 15 255 11 trade (imports plus exports) to Source : UNCTA D. the ratio of world FDI flows Collective enterprises 42 8 91 4 (inflows plus outflows) to GDP Private enterprises 1 14 6 6 has also risen. global integration seems to have proceeded faster through FDI than through trade.7. b y type of enterprise . the ratio of FDI 1 803 26 883 10 stock (inward plus outward) to Non-equity joint ventures GDP has increased steadily since Domestic firms 7 491 12 4 694 7 State-owned enterprises 7 184 12 4 589 8 1980.Chapter I While the degree of Tab le I. Figure I. with some changes in the relative importance of different host countries (table I.

1997a). It should be noted. Most of the increase in FDI will probably be concentrated in developed countries. to some extent. FDI flows into Asia and the Pacific may at best remain the same as in 1997. The outstanding positions of the United States and Western Europe in FDI inflows in absolute values are obvious. 8 if funds from these sources are included. as well as Latin America and the Caribbean and Central and Eastern Europe.7 the first time that the $400 billion mark had been reached and passed. 9 despite lower global economic growth.10 and decreases in FDI flows to some countries expected in 1998.2. The definition also obscures.6 trillion. the true identity of foreign investors. after a decline in 1996. to $400 billion. FDI flows are expected to increase as well. while outflows. to reach $424 billion (table I. World FDI flows today are nearly twice what they had been in 1990.2 for details). to reach a projected level of around $430-440 billion for both inflows and outflows. the upward trend in world FDI flows set a new record in 1997: inflows grew by 19 per cent. however. and some sevenfold their volume in 1980. that the definition of FDI underestimates the real size of investment by TNCs because it does not cover investment financed by funds raised in domestic or international markets (UNCTAD. FDI/TNC database. because foreign affiliates themselves also make direct investments abroad (see box V. FDI comparisons among regions corrected for market and population-size show a somewhat different picture from that based on absolute values of FDI flows. In 1998. However. Internationalization thr ough FDI and through thr ough trade in selected countries and regions (Percentage of GDP) Indeed.Tr World Investment Report 1998: Trends and Determinants through Figure I. as well as privatizations and further liberalization.11 A major factor behind the FDI growth is the continued trend towards large-scale cross-border M&As. rose by 27 per cent. The Source : UNCTAD. which would be the first time since the beginning of the 1980s that FDI flows into that region did not increase.1). the total addition to the capital base of international production in 1997 may well have been $1. 8 .

4 45. If FDI flows are adjusted for population size.0 6.4 4. In the case of FDI outflows.2 4.8 17. by major region.7 0.0 0.2 11.7 27. as are the top three outward investors.6 0. Similarly.4 2.2 0.0 -0.3 5.6 23.6 27.8 46.7 22. by Figure I.2 0.6 25.2 25.3 100 1996 57.3 22. 9 .9 1.1 100 Outflows 1995 1996 86.3.4 12.0 0.9 49.1 12. Tab le I.2 28.8 6. based on annex table B.already relatively important as a home region in terms of the absolute size of outward FDI -. however.0 47.0 0.1 6. East and South-East Asia The Pacific Europe Central and Eastern Europe 1994 58.4 0.3 11.7 0.1 50.2 42. developed countries continue to be dominant both in absolute and relative terms.0 0. South.5 7.4 39.5 20. half of the top 30 host countries are developing economies.4 12.2 1.2.1 4. Not a single developed country figures among the top 30 recipients of FDI per $1.7 100 1997 58.8 37.5 0.8 12.0 2. In terms of FDI inflows per capita.1 0.8 100 World Source: UNCTAD.4 3. based on annex tables B.7 27.9).7 31.1 14.3 -0. 1994-1997 (Percentage) Inflows Region/country Developed De veloped countries Western Europe European Union Other Western Europe United States Japan Developing De veloping countries Africa Latin America and the Caribbean Developing Europe Asia West Asia Central Asia South. There is also considerable change able distribution inflows outflows.1 0.7 12. Regional distrib ution of FDI inflo ws and outflo ws.3 2.3 1. all developing regions (except for West Asia) become more important as recipients of FDI if judged by FDI flows per $1.3 23.0 0. countries.6 0.7 0.2 14.1 35.9 29.5 0.9 0.6 0.2 0.8 0. a Estimates.8 0.6 0.1 0.4).1 3.0 42. developing countries do not receive as much FDI as developed Source : UNCTAD. East and South-East Asia -. country rankings in terms of absolute flows of FDI and relative flows of FDI yield different results (table I. Among developing countries.1 11.1 20.2 22.1 0.7 14.6 45.2 21.9 0.2 4.1 100 85.4 24.0 14.4 100 1995 63.1 and B.6 100 1994 85.8 0. FDI inflo ws.000 GDP.9 37.000 GDP and almost a half of the top 30 outward investors are developing economies.Chapter I United States and Western inflows.1 and UNCTAD FDI/TNC database.3 29.4 15.4 13.0 1.3 26.5 2.0 0.becomes more important even than the United States if FDI as a percentage of GDP is considered.1 38.8 18.2 100 1997 84.3 14.2 32. simply because many of these regions have such small GDPs. In contrast.6 9.7 20.9 0.5 1.6 0.1 0.2 1.8.3 2. 1980-1997 Europe become less important (Billions of dollars) compared to others if values of FDI relative to market size (GDP) are considered (figure I.

As measured by GDP.4.Tr World Investment Report 1998: Trends and Determinants flows. size by Figure I. 1996 Source: a UNCTAD. FDI flo ws. a by region. 10 . relative to market siz e and population. FDI/TNC database.

64 0.7 203.55 0.1 0.46 1.86 0.1 New Zealand 1019.2 5.5 3.16 0.00 0.4 29.4 23.26 1.80 3.62 0.11 0.29 0.83 0.3 129.90 0.8 Seychelles 402.8 6.6 3.000 GDP and FDI flows per capita.1 Austria 477.2 Malta 813.3 Switzerland 483. Grenada Bolivia Seychelles Trinidad & Tobago Botswana Peru China Angola New Zealand Chile Malaysia Belgium & Luxem.1 4.8 26.5 US Virgin Islands 3867. of China Australia Chile Canada Denmark Germany Zimbabwe Nigeria Ireland United States Rep.59 0.10 0.1 701.4 23. Chapter I 11 .7 1480.13 0.4 Israel 424. of China Seychelles Austria Malta Spain Israel Italy Rep.4 Malaysia 227. of Korea Estonia Iceland 0.39 1.6 483. Vincent & Gren.9 5.8 Chile 282.8 3.0 22.9 0.5 2.0 583.4 United Kingdom 445.9 186.28 0.11 0.50 0.7 2718.0 108. Ireland Israel India 76. of China Malaysia Finland Denmark China Austria New Zealand Chile Thailand Panama Por tugal Israel Ireland 74.2 6.9 131.7 Australia 298. The world’s lar g est host and home economies f or FDI flo ws.14 0.3 1.43 0.2 5.30 0.7 3.1 1.20 0. 1338.9.57 0.5 2.11 0.5 5.6 2.5 6.0 347.7 0.5 2.8 0.66 12.9 Ireland 688.000 GDP Per capita (Dollars) 4474.0 3.50 1.1 9.7 4.4 1.7 Hong Kong. based on FDI/TNC database.11 0.6 Dominica 253.6 170.1 11.68 0.5 8.10 0.5 5.84 3. Brazil Singapore Mexico Netherlands Spain Canada Indonesia Sweden Australia Argentina Malaysia Poland Chile Norway Austria New Zealand Peru Switzerland Italy Colombia Hong Kong.18 1. of Korea Bermuda 32812.58 0.1 4.20 0.4 Equatorial Guinea Bermuda Azerbaijan US Virgin Islands Guyana Viet Nam Cambodia Vanuatu Singapore Malta Kazakhstan Lao PDR Solomon Islands Saint Kitts & Nevis Dominica Latvia St.8 inflows FDI inflo ws Absolute value (Dollars) 23.0 173.3 2.5 Bahamas 311.7 3.0 Saint Kitts & Nevis 404.93 0.51 0.49 Per $1.7 United States 287.6 8.4 6.09 0.15 0.09 Hong Kong.5 40.5 Netherlands 497.2 5.000 GDP Rank Econom y Economy ($billion) Economy Econom y 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 United States China United Kingdom France Belgium & Luxem.81 0.29 0. China Panama Bermuda Netherlands Singapore Malaysia Switzerland Norway United Kingdom Belgium & Luxem.5 285.1 11.16 0. China Japan Netherlands Switzerland Canada Belgium & Luxem.5 Cayman Islands 15937.4 2. 1996 outflows FDI outflo ws Per capita Economy Economy (Dollars) United States United Kingdom France Germany Hong Kong.9 1595.59 0. of Korea Taiwan Prov.7 3.1 102.6 244.70 0.62 0.59 0.17 0.6 Belgium & Luxem.4 6.5 2.9 793.8 579.7 Antigua & Barbuda 284.1 1346. China 424.8 Sweden 622.15 0.4 337.9 Singapore 3284.9 0.5 Trinidad & Tobago 242.37 0. Italy Australia Norway Spain Sweden Singapore Rep. Finland United Kingdom Sweden France Denmark Germany New Zealand Australia Panama Canada United States Iceland Ireland Japan Malaysia Taiwan Prov.76 0.9 281.5 4.8 3.2 Equatorial Guinea 917.8 34.19 0.1 Iceland 302.8 4.0 14. Namibia Source : UNCTAD.7 France 377.58 0.39 0.8 361.4 177. FDI flo ws per $1.1 30.20 0.8 1671.2 Hong Kong.2 7. Finland Seychelles Botswana Sweden France New Zealand Malta Taiwan Prov.4 3. China Bermuda Singapore Switzerland Netherlands Norway Belgium & Luxem.4 Aruba 1190.6 320.82 0.5 521.1 4.11 0.0 Economy Economy ($billion) Econom y Economy (Dollars) Economy Economy Absolute value Per $1.27 0.5 26.8 179.4 8. China Russian Fed.6 Norway 909.able world’ larg orld’s for flows.69 0.9 179. flows flows Tab le I.

5. the ratio of FDI to gross fixed capital formation provides a closer indication of the role of TNCs in a given economy. including the countries of Western Europe. While the United States has been increasing its share in world FDI since 1996. FDI/TNC database. 1994-1996 inflows percenta centag gross fixed formation. most of them developing countries (51). Israel.g. There are 63 countries that fall below the level of the world average of 5. Although there was a significant increase in FDI inflows into Japan in 1997.3. to reach $233 billion in 1997 from $195 billion in 1996. New Zealand and South Africa) continued to absorb nearly three-fifths of world inflows.3 per cent (figure I.Tr World Investment Report 1998: Trends and Determinants in the ranking of individual countries with respect to inward and outward FDI if relative indicators are used. a Number of countries with percentage ratios of the level or range specified. In addition there are 8 countries relation to gross fixed that have ratios below 0 per cent due to negative FDI inflows.8 and figure I.8). Japan and several other countries (Australia. The magnitude of this role Figure I.13 (a) i. ranging from small (e.5). Bangladesh. do developed regions (figure I. All this implies that one has to look beyond absolute levels of FDI in order to understand the significance of FDI for different regions and countries. see also chapters V and IX): 12 . Japan. Japan’s share in world FDI inflows. Flows into developed countries have risen substantially between 1996 and 1997. Western Europe saw its share decline noticeably in 1996 and has not yet regained it (table I. Inflows Developed countries and Central and Eastern Europe Developed countries. North America (Canada and the United States). Rwanda) to more than 30 per cent (Botswana. varies from country to country. Singapore) of the share of FDI in domestic gross fixed capital formation. however. did not surpass 1 per cent in that year. As FDI inflows constitute a part of total capital investment in host countries. due to large inflows through large-scale M&As. which had been minuscule during the preceding four decades. Does not include countries (34 in all) for capital formation than which data on gross fixed capital formation are not available. all developing regions (except West Asia) receive more FDI in Source : UNCTAD. Central and Eastern Europe’s share in world FDI inflows remained below 5 per cent in 1997. More specifically (table I. Nigeria. 12 On a regional basis.5). FDI inflo ws as per centa g e of gr oss fix ed capital f ormation.

particularly inducing M&As by foreign firms. surpassing their level of 1995. however.Chapter I • United States. FDI flows into Central and Eastern Europe -.a group of economies in transition -. 13 . It should be noted that.the group of Source : UNCTAD.had more than doubled in 1995. compared to 84 per cent in 1990 and 82 per cent in 1995. leaving the second largest host country (United Kingdom) behind by more than $50 billion. Foreign investors responded favourably to improvements in the European Union’s economic performance and the strengthening of its macroeconomic indicators in time for the introduction of the Euro in 1999. by far. In 1997. the absence of large divestments. Inflows rose due to. • • • ii. some 90 per cent of investment outlays in foreign affiliates were made through acquisition of United States businesses. 1998). Central and Eastern Europe. the response of foreign firms to the ongoing liberalization measures in the retail and financial industries. With macroeconomic indicators such as the GDP growth rate. unlike 1996. because of a change in the coverage of FDI statistics since 1996. reflecting especially an M&As boom in United States high technology (including informatics) industries. among other reasons. Developing countries flows developing Figure I. inflation and employment showing their best performance in decades. a level comparable to that achieved by Latin America and the Caribbean in the early 1990s. Flows into the United States were. The former. new FDI was again (as in 1996) exceeded by FDI withdrawals. inflows rose by one half in 1997. FDI data for Japan now include reinvested earnings. to $19 billion. official finance accounted for more than a half of the flows to developing countries (World Bank. Other developed countries.14 Western Europe. M&As were the principal modes of entry of FDI to the United States. 1990-1997 Developing countries are recipients of both official and private capital flows. as during the previous three years. the Netherlands.6. official finance declined by 3 per cent annually (World Bank. Capital flo ws to all de veloping countries. have declined in relative importance: at the beginning of the 1990s. after a dip in 1996. Investment flows into the European Union reached $108 billion in 1997. based on World Bank. for example. 1998 and UNCTAD. and low asset prices. Official development assistance (ODA) to the least developed countries (LDCs) -. TNCs were also beginning to respond to the impending single currency in the European Union. accounting for more than one-fifth of world FDI inflows. the largest to any individual country. While the volume of overall flows grew on average by 16 per cent annually in nominal terms over the period 1990-1997. that share was barely 15 per cent (figure I. but no more than about half the flows into. After a decline in 1996.6).16 by 1997.a record level of inflows for that country. Australia continued to receive large-scale investments.15 The United Kingdom continued to be the largest host country for FDI inflows in 1997. FDI in Japan amounted to more than $3 billion in 1997 -. In Germany. which were 10 per cent of inflows in 1997. FDI flows into the United States exceeded $90 billion in 1997. 1998).

Total priv ate flo ws to de veloping investment decisions are increasingly by flow countries. During the period 1992-1997. and declined by 14 per cent in nominal terms (11 per cent in real terms) in 1996. it has shown greater volatility than FDI (box table). 1990-1997 made on a regional or global scale.e.i. 1998. 14 .7). Direct investors may also have a variety of motives -. followed by total portfolio investment (0. Barriers to capital movements have been abolished in many countries and private flows developing Figure I. TNCs are normally more interested in longer-term profits from the production of goods and services.7. An analysis for 12 major developing economies and economies in transition shows that. The growing importance of private flows reflects the trend towards liberalization and globalization in the areas of investment and finance. Mexico is a case in point: even when portfolio investment fell sharply in Mexico in 1994-1995 during the peso crisis. especially if these are parts of integrated international production systems. Among private foreign capital flows. /.1. as FDI is made through the establishment of production facilities. and is thus less prone to reversals in response to adverse situations if these are perceived to be short term. portfolio Source : UNCTAD. For a few countries. for roughly one-tenth of private capital flows to developing countries over the period 1990-1997. in most of the cases. The greater overall stability of FDI flows in comparison with portfolio investment flows can be attributed to several factors. FDI for about a half of such flows. unlike FDI. as measured by the coefficient of variation.2) and FDI/TNC database..1). FDI was more or less sustained (see chapter VIII). they may be seeking markets or resources or efficiencies -. which can be disposed of easily by selling in financial markets. including Brazil. Chile and the Republic of Korea. Commercial bank loans accounted. b For most countries. or the acquisition of existing facilities in recipient countries.35) (box table). it is difficult to dissolve or sell them at short notice.and this variety might be expected to reduce the risk of “herd” behaviour. volatility coefficients were higher for FDI than for portfolio investment during the period under consideration. the coefficient of variation based on annual data has been higher for foreign portfolio investment than for FDI during 1992-1997 (box table). The motivation to invest in the case of FDI is typically based on longer-term views of the market. the picture indeed looks different for private flows (figure I. Moreover. Divestment and reversibility are thus more difficult for FDI than for portfolio investment.Tr World Investment Report 1998: Trends and Determinants countries most in need of such flows. The volatility of foreign portfolio investment and FDI flows into developing countries Repeated episodes of financial turmoil have focused international attention on the problem of volatility of private foreign capital flows and the extent to which that volatility creates an unstable environment detrimental to economic development. The LDCs apart. based on World Bank.43) a and FDI (0. the growth potential and the structural characteristics of recipient countries. commercial bank loans displayed the highest volatility (0. while portfolio investors are normally more interested in quick financial returns on their investments (UNCTAD. b y type of flow.remained stagnant from 1990-1995.71). as reflected by the fact that ODA accounts for the major share of their net capital inflows -. 1997a). and UNCTAD investment for about a third (box I. portfolio investment is more volatile than FDI since. Box I.. it is attracted not so much by the prospect of long-term growth as by the prospect of immediate gain (box I. on average.

Chapter I (Box I.1 1. investments made by venture capital funds tend to have a long-term duration.22 0.8 21.7 1.4 11.0 6. therefore. 1992-1996. Portfolio investors’ strategies combine with the problems of asymmetrical information and the inherent volatility of emerging markets and make portfolio investment more prone to “herd” behaviour.2 10.68 0.1.3 0.38 0.71 0. Depositary receipts are traded in foreign markets.01 0.43 0. but it is more affected by short-term fluctuations in financial markets that influence investors’ expectations of capital gains.36 0. Note: FPI = foreign portfolio investment.96 0.9 2.1 0.57 1. 15 .71 0. January through August only.4 0.9 8.9 1.8 29.6 3. c For 1997.6 4. Volatility of foreign portfolio investment and FDI flows in selected developing countries and economies in transition.52 0.1 0.25 0.. based on official national sources.41 1. 1992-1997 Average flows (Billion dollars) Region/country All developing countries FDI FPI Equity Bond Commercial bank loans Argentina FDI FPI Brazil FDI FPI Chile FDI FPI China b FDI FPI Hungary c FDI FPI Indonesia FDI FPI Korea.19 0.57 0. FDI/TNC database.51 0.63 0.40 1.35 0. continued) Portfolio investment is not unrelated to the growth of the corporate sector of recipient countries.47 0.2 63.2 31. data provided by IMF and UNCTAD. of FDI FPI Mexico FDI FPI Philippines FDI FPI Singapore b FDI FPI Thailand b FDI FPI Uruguay b FDI FPI Coefficient of variation a 100.3 10.3 11.9 3. a Defined as the standard deviation divided by the mean. c Some channels through which portfolio investment takes place enforce greater stability than others because of their specific structural and regulatory characteristics.4 2.3 1. b /. thus allowing some insulation of domestic Volatility Box table. Closed-end funds are not required to meet redemption and do not.52 0.46 1.3 33. For example..7 6.31 0.38 0.65 Source: UNCTAD.51 0.33 0.46 0.2 0.6 2. Rep.6 1.8 2.71 0. need to liquidate their investments at short notice.

1997a. two common components of FDI outflows.) However. in an environment where exchange rates or interest rates are volatile.the subregion which has accounted for the dominant share of FDI in developing regions in the past decade or so -. (Both in 1996 and 1997. 1997a).) Developing countries have. one component of total portfolio flows to emerging markets during 1986-1995. however. This could be due to various factors. (For details on regulations on foreign portfolio investment in the Republic of Korea as well as 24 other emerging market economies. 1998c. it should be noted that FDI as currently measured contains elements of financial flows that can be affected by movements in interest rates and exchange rates in both source and recipient countries. This percentage was gradually lifted from 10 per cent to 26 per cent in November 1997. In 1997. and will be abolished by the end of 1998. they accounted for close to two-fifths or $149 billion of world FDI inflows. the Republic of Korea applied limiting regulations to foreign equity participation in companies listed in the stock market. Examples include the expansion of Japanese international production financed through FDI in the latter half of the 1980s when the yen had appreciated. leading both to massive withdrawals in a crisis as well as to rapid recovery once confidence is restored. for example. 1997a). the analysis indicated that. become increasingly attractive for foreign investors. It can be channelled to recipient countries through venture capital funds. Flows into South.increased slightly in 1997. For example. for Brazil. For a detailed analysis of portfolio investors’ behaviour and strategies. Major trends in various developing regions are as follows (table I. which minimized the volatility of portfolio equity investment. Even though there was a modest decline in inward investment in the five countries most affected by the financial 16 .108). Source: UNCTAD.Tr World Investment Report 1998: Trends and Determinants Box I.a region that had continuously claimed an increasing share of FDI among developing countries since the early 1980s and had received the largest share among the developing regions in 1996 -. 1998d. p. to investment that provides financial capital to an enterprise in a country other than that of the investor. A similar analysis comparing the volatility of FDI and foreign portfolio equity investment. Developing Asia -. a higher variation coefficient for FDI is likely to have been caused by recent increases in FDI through privatizations. and to 55 per cent in April 1998. East and South-East Asia -. see UNCTAD. figure I. twice the level they received in 1993 and tenfold the level in 1985. substantial outflows of portfolio investment during the last quarter of 1994 and the first quarter of 1995 were followed by substantial inflows in the first half of 1997. FDI flows into developing countries were larger than those into Western Europe. Changes in exchange rates can also affect the way in which international production is financed and hence the size of FDI flows at any given time. by about $30 billion. despite the financial crisis that hit several East and SouthEast Asian economies during the second half of the year. the volatility of portfolio investment was lower than that of FDI. For Chile. see UNCTAD. American depositary receipts and global depositary receipts (UNCTAD. investment funds (mutual funds and closed-end funds). the low volatility of portfolio investment can be explained by controls imposed on short-term capital inflows.1 (concluded) markets from external turbulence. there have been significant changes in the pattern of FDI flows into developing countries. high interest rates in the United States during the 1980s encouraged United States firms to finance their capital expansions abroad by borrowing in recipient countries. Moreover. but does not involve any management control in the enterprise (UNCTAD. with a relative variance four times that of FDI flows (UNCTAD. showed that the latter fluctuated more widely.3 and chapters VI-VIII): • Asia and the Pacific. On the whole. in principle.8. e In Brazil. Until 1997. indeed. d As noted. portfolio investors have a greater tendency to take concerted action. Chile and the Republic of Korea. TNCs might simply postpone their decision to invest. a b c d e Foreign portfolio investment refers.lost in relative importance in 1997. In Mexico. rather than through equity or intra-company loans. Nevertheless. There was a corresponding increase in the share of Latin America.

there was a marked slowdown in portfolio flows to developing countries in 1995. Argentina. Taiwan Province of China and Thailand). Brazil. the decline was due almost entirely to a fall in the value of Asian funds -. followed by Latin America (24 per cent). Indonesia. Chile. Reflecting the impact of the financial crisis. Recent trends are. This region was the star performer among the developing country regions in 1997. Flows into the Pacific remain at a low level. In fact. All data in this paragraph are calculated by UNCTAD. as emerging market economies. the Russian Federation dominated. the Republic of Korea and Indonesia also relied increasingly on bonds and notes.453 and $122 billion between 1996 and October 1997. and in Africa. only the Republic of Korea and Thailand attracted more portfolio investment than direct investment. Chile and Mexico). Foreign portfolio investment: recent trends The importance of foreign portfolio investment in developing countries has increased since the early 1990s (text figure I. Central Asia -. Czech Republic. and Africa and West Asia (3 per cent).7).4). d it appears that countries in Latin America (except Chile) generally rely more on foreign portfolio investment than on FDI: on average. however.began to attract large-scale oil-related FDI in 1995 and is now a larger FDI recipient than West Asia. 17 . following the onset of the Mexican crisis. China. investment in China compensated for that decline. Box I. and particularly Mexico. 1997c). Brazil.the magnet for FDI in the region -.another oil-producing subregion -. Flows into India also increased. In particular. the continuation of the integration process in MERCOSUR. Mexico. the largest funds were concentrated in three countries (Brazil. Hungary. c Based on detailed data for 13 countries. South Africa was the dominant country in terms of size of equity funds held.from $68 billion to $38 billion. e a b c d e This can be contrasted with the debt crisis of developing countries in the 1980s: it took seven or eight years for the countries affected. regained access to international capital markets.521 and $139 billion to 1. and protracted debt negotiations with their commercial creditors before they were again able to tap international capital markets. based on information provided by Micropal.despite some remarkable efforts by countries in that region to improve their FDI climate (UNCTAD. These contrasting outcomes partially reflect the more serious systemic risk that emanated from the 1980s crisis. flows increased strongly the following year.Chapter I crisis. The number and net asset values of emerging market equity funds decreased from 1. India. mostly in Latin America. With new investments in Saudi Arabia and low but constant flows of FDI to other countries. With only a negligible impact of the financial crisis in Asia on the region. there was again a reduction of about 6 per cent in portfolio flows to developing countries. Singapore. but did not reach the levels of the early 1990s. Thailand. a In 1997. attracting an additional $12 billion over 1996. Data were collected from national and international sources for the following countries: Argentina. five economies held the largest amounts of equity funds (China. Thailand and Uruguay. Philippines. East and South-East Asia still held (at least until October 1997) the lion’s share of total regional and country funds (58 per cent). Central and Eastern Europe (15 per cent). inflows in 1997 increased over those of 1996. Among the six Asian countries in the list. Republic of Korea. Mexico. characterized by large year-to-year fluctuations. based on information provided by Micropal. However. FDI in West Asia has been lagging because of low demand for oil -. because of the onset of the financial crisis in Asia. the region re-emerged as an important host for FDI.2. partly as a result of the reinstatement of special fiscal incentives to foreign investors in 1997. most equity funds targeting countries in other developing regions increased in value in 1997. their inward portfolio investment flows have by far exceeded their inward FDI flows since 1992. which were mainly allocated to the corporate sector. Republic of Korea. • Latin America and the Caribbean. UNCTAD. In Asia. ibid. b Despite the decline in value in 1997. in Central and Eastern Europe. and privatization programmes on stream in many countries. South. rivalling and even surpassing South. East and South-East Asia in FDI per capita (figure I. in Latin America.

the record FDI flows in 1997 were mainly caused by significant increases in equity investments. mainly due to decreased FDI by investors originating in South. on account of improved economic performance. The LDCs. In particular. Because of this. Continued weak demand and low prices for commodities served to dampen FDI in the primary sector. all of the member states in the European Union recorded growth rates in 1997 that were equal to or higher than those in 1996. or 0. East and South-East Asia. LDCs that received higher inflows in 1997 included Bangladesh. On the other hand. because of recent discoveries of natural gas. the LDCs as a group could maintain almost the same level of FDI in 1997 as in 1996 (a record year). despite a decline of FDI to Asian LDCs from neighbouring countries affected by the financial crisis. the two major traditional host regions of United States FDI. (Billions of dollars) European Union.8 per cent of world GDP. mainly made outflows by Figure I. European Union FDI outflows in 1997 were also affected by the growth of the main host regions for the Union’s FDI -. In fact. on account of its oil deposits. Because of relatively large increases in FDI flows into a few countries.8. Recent macroeconomic improvements in the continent bode well for FDI in the region but they have not yet led to significantly increased flows. and Angola. Figures for 1997 are estimated. • (b) Outflows Developed countries still account for the bulk of world outflows. as well as increased interest by member states in the single market in the • Source : a UNCTAD. Latin American TNCs gained in importance as foreign investors.8 and figure I. Although more than a half of United States outflows of FDI are financed by reinvested earnings.8): • United States.1 and UNCTAD FDI/TNC database. Noteworthy aspects of FDI outflows in 1997 from major regions are as follows (table I. This is low even relative to their market size as measured by their GDP.the United States and its own region.8 billion. The group of 48 LDCs received FDI inflows amounting to just $1. which was 0. FDI outflo ws b y major region. 18 . based on annex table B. still the key sector influencing the level and composition of FDI in Africa.Tr World Investment Report 1998: Trends and Determinants • Africa. 1980-1997 through M&As. sustained by higher economic growth at home as well as in the major host regions of United States FDI. The dominant position of the United States in outward FDI was further strengthened in 1997. Uganda and the United Republic of Tanzania.5 per cent of world FDI inflows in 1997. the importance of developing countries with respect to outflows decreased somewhat in 1997. increased significantly. flows into Latin America and to the European Union. As with inflows.

Equity investment increased in 1997. Thus. Coupled with high regional economic growth. also decreased significantly. very likely to decline in 1998. however. The economic recession and the financial problems of major Japanese banks did not start affecting FDI outflows from Japan seriously in 1997. as had happened several years before. is emerging as a large investor in the region. Indeed. cross-bor oss-border Figure I.7 and UNCTAD FDI/TNC database. Taiwan Province of China. • • 3. following a decline in 1996. representing the highest share attained in the 1990s (figure I. which absorbs the bulk of FDI from that economy. In the principal outward investor subregion of East and South-East Asia. Liberalization.g. Outward FDI from other countries affected by the financial crisis. they are. the share of intraregional flows increased in 1997. Mergers and acquisitions In 1997.10). total cross-border M&A transactions worldwide amounted to some $342 billion. FDI outflows reached a record $9 billion. 1985-1997 Source: UNCTAD.9. Companhia Cervejaria Brahma of Brazil). Cross-border M&As accounted for the bulk of the increase in FDI flows. investment outflows from Japan increased in 1997.g. Cross-border M&As accounted for about one-quarter of all M&As worldwide (figure I. 19 . Some of the firms based in this region are global players (e. On the other hand. declined for the first time since 1988 as a result of the problems faced by Korean firms caught in the Asian financial turmoil. European Union TNCs directed more FDI flows to countries within the region in 1997 than in recent years. Thus FDI inflows into the major host countries of intraregional investments by TNCs based in these countries such as Viet Nam and Myanmar declined. outflows from the Republic of Korea. such as Thailand and Malaysia (relatively large investors within the region).Chapter I light of the introduction of the Euro in 1999.18 Asia and the Pacific. Hong Kong Special Administrative Region of China (hereinafter “Hong Kong.9). particularly within the region. Latin America. their value in relation to total FDI inflows rose from 49 per cent in 1996 to 58 per cent in 1997. flo ws.17 • Japan. Reinvested earnings accounted for about one-fifth of total FDI outflows from Japan. following the announcement of the date of completion of the single market in 1987. FDI by firms from Brazil. Chile and Mexico (as well as some tax-haven economies) surpassed one billion dollars per country. China”) continued to invest mainly in China. relatively unscathed by the crisis. pushing the record level of the annual value of cross-border M&As beyond that of 1996. The relationship between cr oss-bor der M&As and FDI flows. Cemex of Mexico) but most are still regional firms (e. based on annex table B. the largest host country in the region. privatization and regionalization have encouraged Latin America’s TNCs to increase investments abroad. having risen for the past several years.

12). from $59 billion to $86 billion and $161 billion. and telecommunication and media industries (figure I. banking and insurance became the dominant industry for large M&As. While firms from the United States continue to account for the single largest share of large-scale cross-border M&As. Company. The largest cross-border deal in 1997.11. Inc. the average size of large-scale crossborder M&As increased from $1. The number of such deals worth more than $1 billion increased from 35 in 1995 to 45 in 1996 and to 58 in 1997. (Majority purchases are transactions in which the foreign investor acquires more than half the voting securities of the resulting business. Developed countries continued to account for about 80 per cent of all cross-border M&A sales.) D e v e l o p i n g countries remain in a relatively unimportant position in the cross-border M&A Source : UNCTAD. the growth of large-scale cross-border M&As by firms based in Switzerland is impressive. in all of which companies face severe competitive pressures in global markets. (Percentage of total value) totalling $236 billion in 1997. In fact. flows (figure I. a 1995-1997 m a j o r i t y p u rc h a s e s .1). During 1995-1997. Principal home countries of firms enga g ed in lar g e cr oss-bor der per cent of cross-border M&As. Large-scale M&As were concluded mainly among developed country TNCs. a their position in FDI Acquisitions exceeding $1 billion. respectively.I. Cr oss-border and all M&As in the w orld value of M&As was due to largescale cross-border M&A deals. Source : UNCTAD. France and Germany) also play an important role (figure I.13).4 billion (annex table A. and about 90 engag larg cross-bor oss-border Figure I.11). (New York). In addition. based on data provided by Secur ities Data compared to one-quarter in 1995. these mega deals accounted for about a half of global M&A transaction values in 1997. and their value. chemical and pharmaceutical.10. Large cross-border M&As are concentrated in the banking and insurance.8 billion in 1997. based on data provided by Securities Data Company. The 20 . other countries (especially the United Kingdom.Tr World Investment Report 1998: Trends and Determinants Most of the increase in the Cross-bor oss-border world Figure I. (New York) market. between Zurich Versicherungs GmbH and BAT Industries PLC-Financial. In 1997. Inc. was valued at $18.7 billion in 1995 to $2. as compared to and UNCTAD 1996a and 1997a.

based on data provided by Securities Data Company.19 Indeed.Chapter I relatively low share targ larg cross-bor oss-border Figure I. a b y group of countries. from its current 21 . majority M&A sales in South. mainly on account of privatization. an upward trend in M&A sales by developing countries and countries in transition is noticeable. resulting in even larger TNCs.13. Cr oss-border M&A sales and pur c hases. 2010. Major tar g eted industries in lar g e cross-border M&As. However. of minority sharea Acquisitions exceeding $1 billion. developing countries again account for less than they do in world FDI inflows.14 for capital links in the automobile industry). in particular after the 1997 financial crisis. seem to impel other major TNCs to move towards restructuring or making similar deals with other TNCs. for example. Inc.7). On the sales side of majority M&As (figure I. South. considering all cross-border M&A purchases including minority deals. One recent feature is that M&As among large or dominant TNCs. the total number of major automobile makers may well Source : UNCTAD. are typical examples 1993-1997 of industries in which such a concentration trend can be observed (see figure I. telecommunications and financial industries Cross-bor oss-border purc by group Figure I. decline to 5-10 by a Only M&As in which the foreign investor acquires more than a half of the voting securties are included. in entering markets through FDI. Among developing countries. East and South-East Asia have been increasing recently. holding. automobile. As in the case of outflows.8) in 1997 or only a half of their share in FDI outflows -.12. developing countries accounted for a share almost equal to their share in FDI outflows.suggests that TNCs from developing countries prefer the greenfield mode. Significant increases in M&A sales in Latin America and in Central and Eastern Europe were also recorded in 1997. or acquisition Source : UNCTAD.13 and annex table B. the doubling or tripling of M&A sales in Brazil and the Russian Federation is clearly linked to privatization. The pharmaceutical. The result is a change in industry structure. based on data provided by KPMG Corporate Finance. For example. East and South-East Asia accounts for the bulk of developingcountry cross-border M&A purchases. In the automobile industry. a 1995-1997 of developing (Percentage of total value) countries in majority M&A purchases -about 8 per cent (annex table B. (New York) and UNCTAD 1996a and 1997a.

Banking. a 1998 Republic of Korea United States United Kingdom Japan Germany Others Daewoo Isuzu Nissan G. most of these transactions were concluded by investment bankers or brokers whose purpose is to seek capital gains rather than to expand into unrelated business areas. Merger. with seven firms having sales of over $10 billion each. Does not include technology agreements. Figure I. Cross-border links among major TNCs in the automobile industry.I. a Lists only the automobile TNC that have cross-border capital links. M. liberalization and deregulation are the other main factors behind the dramatic increases in M&As in both developed and developing countries. Possible acquisition (1998). there are fewer deals among unrelated firms. This indicates a strategic shift by TNCs to focus on their core activities. Even though about one-fifth of the largest deals (13 of 58 cases) in 1997 were made among firms whose businesses were unrelated (annex table A.15).21 accounting for about a quarter of the $300 billion market. many markets are now controlled by a small number of firms. by the conclusion of WTO’s financial services pact in December 1997 (see chapter III).14.1). Vauxhall Opel (Sweden) Saab Rolls Royce Volkswagen (Canada) CAMI Nissan Diesel Jaguar Kia Mazda Ford Aston Martin Audi Skoda (Czech Republic) Chrysler Hyundai Mitsubishi Rover Daimler-Benz BMW Suzuki Maruti Udyog (India) Keys: Acquisition (including minority acquisitions). 22 . The trend towards M&As is also accelerating the sale of non-core operations or affiliates by firms and the acquisition of similar operations from other firms (of divisions or affiliates. there has been a string of M&As among large firms. Unlike in the late 1980s. based on information provided by Gendai Advanced Studies Research Organization (Tokyo).Tr World Investment Report 1998: Trends and Determinants number of 15. In addition to the strategic considerations of firms. among others. Increasing M&As in the services sector in general and in financial industries in particular reflect ongoing liberalization exemplified.22 In both industries. The value of cross-border M&As in the services sector has been larger than in the manufacturing sector every year since 1995 (figure I.20 In the pharmaceutical industry. Source: UNCTAD. or of firms that have similar businesses). finance and insurance industries accounted for industry.

For example.23 It is interesting to note. p. a total of 8.15. including FDI from other industries (such as the software industry and the construction industry). and in aviation in particular. The gr o wth of inter -firm tec hnology a greements.24 with the number of such agreements rising from a yearly average of less than 300 in the early 1980s to over 600 in the mid-1990s (figure I. in M&A transaction values (annex table B.Chapter I distribution cross-bor oss-border Figure I.16). production became more knowledge-intensive across a wider range of industries. Some 650 such agreements were recorded in 1996. that a Includes only M&As in which the foreign investor acquires more since full or majority ownership by foreign than a half of the voting securties. after banking and finance. 14). a 1989-1997 cross-border M&As in 1997 (annex table B.16. The production and distribution of electricity -. it has attracted substantial FDI. 1980-1996 (Number) Source : MERIT/UNCTAD database. B. Product life cycles have thus shortened and the costs.an industry that is beginning to be opened up to foreign firms in many countries -. 23 .9. Underlying the upsurge in inter-firm technology agreements are a number of changes in the pattern of production and competition.254 inter-firm technology agreements were recorded in the MERIT/ UNCTAD database. The value of cross-border M&As is therefore small. During the 1980s and 1990s. In fact. Inter-firm technology agreements Inter-firm Inter-firm agreements include a wide variety of arrangements between firms for R&D as well as for the production and distribution of goods and services. majority M&As do not figure as highly as in total M&A transactions. code sharing -.for example.I. A subset of these agreements involve technology-related activities (UNCTAD. This in turn has led to increases in R&D expenditures and the speed with which new products are developed and moved to market. 1997a. firms is not normally allowed in this industry. it is expected that all leading telecommunication firms will be privatized in Latin America by the year Source : UNCTAD.9). 2000. Prospects for cross-border M&As in telecommunications are still high. risks and uncertainties of keeping up with the technological frontier or moving beyond it have increased. (Percentage of total value) Telecommunication is another industry that has been significantly liberalized. because of its importance for other industries and the large market for its services. based on annex table B. In some industries such as transport. it has become the second largest industry. five of the top 58 largest cross-border M&As were in this field in 1997 (annex table A.rather than outright mergers. To respond to these new gro inter-firm technology Figure I.is another area in which large-scale M&As have taken place recently. however.1).9). deregulation has led to inter-firm agreements -. Over the period 1980-1996. Sectoral distrib ution of cr oss-border about one-quarter of the value of majority M&As.

Figure I. 24 . and M&As. A rank-order correlation of the assets abroad (UNCTAD. however. Developed countries Behind the aggregate figures.18). The need to amortize the higher costs of R&D across a wider geographical space and the opening of new markets to competition have accelerated the pace of M&As within the overall process of both foreign and domestic investment. liberalization has contributed to the integration of markets and to the diffusion of a process of innovation-based competition. Throughout much of the inter-firm technology agreements. As M&As rose sharply in 1996 and 1997 (figure I. rising to over 40 per cent in 1991. pp. but their share of the total number of such agreements has varied considerably over Figure I. a 1985-1996 Source : a MERIT/UNCTAD database.26 Nor does large size alone predict a continuously high involvement in arm’s-length technology agreements. 1. 1997a. More internationalized firms. In particular. for example. The share of the w orld's lar g est 100 firms world's larg time (figure I.17). Differences in strategy also emerge from an analysis of the type of agreements that have been signed over time.3072 and its significance at the . two types of inter-firm agreements can be distinguished (UNCTAD.18. but steeply declining to just over 20 per cent in 1995 and 1996. firms have sought to increase their flexibility and leverage their R&D investments through inter-firm agreements.10). Inter -firm tec hnology a greements. the trends in inter-firm technology agreements have thus largely parallelled those in M&As (figure I. Driven by these underlying processes. are not necessarily those that are most involved in inter-firm technology agreements.Tr World Investment Report 1998: Trends and Determinants competitive conditions. as well as among different types of inter-firm agreements. They emerge in the choices firms make between the acquisition of assets and the use of arm’s-length inter-firm technology agreements. a 1980-1996 (Percentage) 1980s. Large firms have certainly been active players in inter-firm technology agreements. Majority foreign-owned M&As only. Over the same period. p. particularly among members of the Triad.17. Based on the "Fortune 500" listing for 1995 ( For tune . Source : a MERIT/UNCTAD database. it hovered around 30 per cent. this decline may reflect a tradeoff between M&As and inter-firm technology agreements.002 level in a onetailed test show a very weak relationship between these two variables. Inter-firm technology agreements. 1997a.25 The Spearman’s rank-order correlation coefficient of . lie major differences in the strategies that firms adopt in their relationships with other companies. 29-31) and the number of inter-firm technology agreements of the top 100 TNCs (ranked by foreign assets) in 1995 provides evidence for this. 29 April 1996). in total inter -firm tec hnology a greements.

engineering and marketing are increasingly important inputs in new product development in each of these industries (figure I.20). The preference for one-way agreements shifted to two-way partnerships towards the middle of the decade. the strategic choices of firms with regard to inter-firm technology agreements are shaped by industry-specific characteristics. Some 254 technology agreements were signed in that industry in 1996. Their number has also increased dramatically over time. the slope of the two curves radically changed: whereas. show a similar rising trend. bio-pharmaceuticals. an average number of 223 one-way and 279 two-way agreements were being signed each year. both oneway agreements and two-way partnerships followed similar rising trends (figure I. Number of inter-firm tec hnology industry. the number of agreements peaked in the mid-1980s. To a large extent. Beginning in 1990. b y selected industr y. In the automobile inter-firm technology Figure I. During the 1980s. but the trend lines Source : MERIT/UNCTAD database. The automobile industry is illustrative. remained parallel. and two-way relationships involving joint research and/ or development agreements and the creation of joint R&D ventures with specific research programmes. from an annual average of 74 during the period 1980-1983 to 248 during 1992-1995. there is a rising trend that industry by a greements. it alone accounted for 37 per cent of all agreements (figure I. however. while the number of two-way partnerships rose to 468. Data covering the period 1980-1996 show that information technology remains the top industry in which technology agreements are being signed. particularly. Strategies of vertical disintegration and the use of new forms of supplier-client Source : MERIT/UNCTAD database.20). Industries that are highly knowledge-intensive have the largest number of inter-firm agreements. during the 1988-1991 period. These diverging trends have continued in 1996 when only 109 one-way agreements were signed as compared with 541 two-way partnerships. their share in total agreements doubled from 14 per cent during 1980-1983 to 28 per cent in 1996.1980-1996 in which the flow of technology is from (Number) licensor to licensee or from one joint-venture partner to the other. The entry of newcomers from Japan during the 1960s and 1970s brought with it a fundamental restructuring of the global industry.1980-1996 tec hnology a greements. The e volution in the type of inter-firm 14): those that involve a one-way relationship technology agreements.20. design. Sector-specific patterns of competition and industry structure have also been important in shaping the partnering strategies of firms over time.19.Chapter I ev inter-firm Figure I. although R&D. Far less knowledge-intensive are the automotive and food industries. 1980-1996 began in the early 1990s and has continued through 1996. agreements have declined since then. In both cases.19). In the food industry. 25 . the average annual number of one-way agreements being signed in 1992-1995 fell to 158. Pharmaceuticals and.

many of which are geared to developing the car of the future.21) and Toyota (figure I. Both companies draw on an international group of manufacturing technology firms as partners. Over time. with Nissan and Volkswagen changing places in 1991. which had been based largely upon the mass production of standardized products and vertical integration. however. 1997). navigational systems and other technologies have led to a variety of partnerships with suppliers of parts and components as well as with other automobile manufacturers. but in its relationships with parts suppliers Toyota works mainly with Japanese firms. 30 per cent for Fiat and 25 per cent for Honda. As agreements with rivals illustrate. 38 per cent for Mercedes-Benz. By the mid-1980s.14). inter-firm technology agreements provide a different array of benefits. In contrast. The top four firms have been virtually identical since the mid1980s. More recently they have also developed a large number of technology partnerships with rival automobile manufacturers. a set of preferred first-tier parts suppliers emerged with whom new forms of partnerships for the design of principal components and subsystems were entered into by companies. 1997). is much more focused on the United States market in its partnerships with upstream suppliers of inputs for parts and components. as the major automobile manufacturers sought to develop a new generation of cars to meet more stringent environmental and performance standards. By 1996.Tr World Investment Report 1998: Trends and Determinants relationships represented a significant break with existing organizational technology in United States and European automobile firms. for firms from developing countries. but the four-firm ratio increased from 40. A look at the portfolio of inter-firm technology agreements held by Ford (figure I. 33 per cent for BMW.22) provides evidence of the differing ways in which companies have met these new competitive challenges. Ford.9 to 71. thus strengthening their market power in the future (Mytelka and Delapierre. 37 per cent for GM. expanding access to a range of possible technologies from other industries. GM’s share of the world market declined slightly. whereas Ford engages in partnerships with a worldwide network of parts suppliers. inter-firm technology agreements remain a critical means of maintaining flexibility. as every assembler sought to cover the full range of vehicles. they can also become a means of controlling the direction of technological change. no major luxury-car manufacturer remains independent.9 to 44. partnerships have begun to increase in the 1990s. Japanese technology partnerships with automobile manufacturers are far fewer and focused less on the development of a new generation of automobiles than on parts and components for such a vehicle.2 per cent over the period 19851995 (Mytelka and Delapierre. Joint development agreements with suppliers of manufacturing technology also became important as factory automation advanced. Nissan and Toyota (Kurylko. Renault and Peugeot.6 per cent and the ten-firm ratio from 63. Figures for supplies of parts by vertically integrated units for other companies were as follows: 43 per cent for Volkswagen. As discussed below. only Ford and Volvo manufactured more than 60 per cent of their parts in-house.27 With the acquisition of Rolls Royce by Volkswagen in 1998 (see figure I. 26 . For firms in developed countries. 1996). the global automobile industry gave every sign of great stability and growing concentration. Despite the role that M&As have played. and setting standards early in the process of new product development -thus ensuring more rapid market penetration. Research into the use of ceramic materials and the development of fuel cells. As to concentration ratios.

Their share has also increased from 4.21. 27 . Developing countries Although inter-firm technology agreements involving firms from developing countries account for only 455 agreements in the MERIT/UNCTAD database. a Signed 2 technology agreements that year. (United States) Bendix Industry Group (United States) Boeing Computer Services (United States) Measurex (United States) Teknowledge (United States) Iscar Ceramics (Israel) Inference Corp. (United States) Ceradyne Inc. accounting for over two-fifths of agreements involving the latter (figure I.984 agreements recorded in the 1990s (figure I. Figure I.2 per cent of the 3. firms from other developed countries were far less involved in technology partnerships with the developing world.270 agreements concluded during the 1980s to 6. portf tfolio technology agreements Ford. The por tf olio of tec hnology a greements of For d. their number is on the rise. from an average of 10 agreements per year in the early 1980s to nearly 40 per year in the mid-1990s.24). 1991 a . (United States) Matsushita Elec. 1995 Chrysler (United States) 1986 Iveco (Italy) 1987.23). (United States) Phoenix Steel Corp. (United States) Guest Keen & Nettlefolds (United Kingdom) Grob Werke Gmbh (Germany) ABB Robotics (Sweden) Advanced Assembly Automation (United States) AT&T (United States) Suppliers for Supplier s of inputs f or components 1983 1986 1986 1988 1989. Sixty per cent of the 191 agreements signed in this period between firms based in the United States and those based in developing countries were concluded in the 1990s. 1989 Nissan (Japan) 1989 Motor Iberica (Spain) 1994 Daimler-Benz (Germany) 1995 Audi NSU (Germany) 1995 BMW (Germany) 1996 Mazda Motor Co. United States firms have been the major partners of developing country firms. (Japan) JBL Inc. Japanese firms. were partners in only 11 per cent of the agreements and firms from other developed countries accounted for barely 4 per cent of the total. While firms from the European Union were also major technology partners for developing country firms and accounted for over one-third of the total. 1983-1996 Man ufacturing tec hnology pro vider s Manufacturing technology providers 1984 1985 1985 1985 1985 1986 1988 1989 1989 1989 1989 1990 American Robot Corp. for example. 1996 a General Motors (United States) 1993. (United States) Occidental Petroleum (United States) 1992 General Electric (United States) Engelhard Kali-Chemie (Germany) FORD suppliers Equipment supplier s 1984 1985 1987 1990 1991 1994 1994 1995 1996 Yamaha Motor Co.9 per cent of the 4.Chapter I 2. 1993 a . (Japan) Source : MERIT/UNCTAD database. Industrial (Japan) Ge. 1994 Garrett Corp. Over the period 1980-1996. 1994(2). Silicones (United States) Hewlett-Packard (United States) Siemens (Germany) Directed Technologies (United States) Cambridge Industries (United States) Lear Sitting Holding (Italy) manufacturer ufacturers Auto man ufacturer s 1988.

accounting for 27 per cent of the agreements involving a firm from the developing world.23. De veloping countr y firms and their par tner s in inter-firm technology agreements. Such agreements accounted for nearly 7 per cent of the 455 technology agreements involving a developing country firm. 1980-1996 (Number) Source : MERIT/UNCTAD database. 1980-1996 (Number) Source : MERIT/UNCTAD database. and their number is rising. 1982-1996 Suppliers for Supplier s of inputs f or components 1986 1987 1987 1988.24. De veloping countries: n umber of inter -firm Developing number inter-firm technology agreements. and the number of such agreements is rising. Nearly half of the 31 agreements involving developing country firms in partnership with one another were signed in the past four years (figure 1.Tr World Investment Report 1998: Trends and Determinants portf tfolio technology agreements Figure I. it reached 13 in Figure I. 1995 Ube Industries (Japan) STK Ceramics Laboratory (Japan) NTT (Japan) 1990 Motorola (United States) Aichi Steels Works (Japan) Manufacturing technology providers Man ufacturing tec hnology pro vider s 1984 1986 1986 1991 1994 Renault Automation (France) Nippon Automation (Japan) Shoun Machine Tool (Japan) IBM (United States) ATR (Japan) TOYOTA suppliers Equipment supplier s 1987 1989 1991 1993 1996 1996 Teleway Japan (Japan) Tokyo Electric Power (Japan) Toshiba (Japan) Showa Denko (Japan) Matsushita Elec. Industrial (Japan) Nippondenso (Japan) MERIT/UNCTAD database.24). The industry profile of partnering activity by developing country firms is significantly different from that of firms in the developed world (figure I. information technology ranks at the top.25). 28 . inter -firm tec hnology a greements. The por tf olio of tec hnology a greements of To y ota. Developing country partner tners Figure I. but it suggests that developing country firms are becoming viable partners in joint R&D activities. manufacturer ufacturers Auto man ufacturer s 1982 1993 1996 1996 General Motors (United States) Volkswagen (Germany) Hion Motors (Japan) Nissan (Japan) Source : Developing country firms are also beginning to partner more often with each other. As in the case of developed country firms. From an annual average of four per year during the 1980s.22. tec hnology a greements.

which links Northern Telecom (Nortel) to four Indian software companies. Industry profile partnering inter-firm technology agreements. But a number of information technology firms from other Asian countries are also forming partnerships. but account for less than 6 per cent of the agreements involving a developing country firm. 1980-1996 (Percentage) Source : a b MERIT/UNCTAD database. Pharmaceuticals constitute the second most important industry for partnering activity by firms from developed countries. Based on 8.Chapter I the 1990s. The Nortel Network. especially with firms from the developed world (box I. In the 1980s.3). Korean firms are the most active here. For developing country firms. the share of two-way agreements had risen to 55 per cent. This is most pronounced in knowledge-intensive industries such as information technology. By providing windows on the world. They also enable developing country firms to leverage their own R&D resources and to build the kind of credibility that attracts other partners and new customers at home and abroad. In the 1990s.254 agreements. but have slowly transformed themselves into two-way partnerships. they serve as a way of keeping up with a rapidly moving frontier. one-way agreements were the norm. Industr y pr ofile of par tnering activity in inter -firm tec hnology a greements. the new two-way partnerships are a bridge to knowledge bases abroad. respectively. technology agreements in the chemical and automotive industries are far more important and account for 19 per cent and 9 per cent of the total. For developing country firms. Based on 455 agreements.3). A second indicator of the extent to which firms in developing countries are becoming viable technology partners is the growing importance of two-way partnerships.25. b y de veloping countr y firms and all firms. is a case in point (box I. with Samsung at the top of the list. accounting for 78 per cent of the information technology agreements involving a developing country. 29 . with 21 alone being signed in 1996. by developing country Figure I. Many technology agreements in industries such as information technology began as one-way arrangements.

Since the firms do not work together. /. software development has become very expensive. although Nortel has invested in training and in the installation of state-of-the-art telecom hardware. computing and networking equipment. arm’slength technical contracts and involved low-skill assignments (such as programme testing and computer-aided design) and very limited interaction between Nortel’s development teams and the Indian firms. the International R&D Group of Nortel entered into global software outsourcing arrangements with two Indian software development companies.Tr World Investment Report 1998: Trends and Determinants Box I. were added to this arrangement in 1992. Wipro Systems. and through the use of new telecommunications-related software. These firms are well-established companies and compete with each other in domestic and international markets: * TCS was set up over 30 years ago and is Asia’s largest consulting group with activities that range from management consulting to information-technology solutions. of which about 8 per cent was invested in R&D. 1998). telecommunications. both of which are located in Bangalore. Currently. The relationship evolved as the Indian partners gained experience with the successful completion of many of these projects. Software is increasingly substituting for a variety of tasks that were previously performed by telecom hardware.) As a result. Silicon Automation Systems (SAS) in Bangalore and Tata Consultancy Services (TCS) with headquarters in Mumbai. which works on a broad spectrum of telecom products. * * * The Nortel network is not equity-based. it has 38 R&D collaboration sites in different parts of the world and has developed strong non-equity R&D-based relationships with four of the leading software firms in India (Basant. was set up in 1984 as a unit focusing on global software outsourcing. retailing. Chandra and Mytelka. founded in 1981. Infosys. Its annual turnover in 1996-1997 was $4..500 employees and a turnover of $14.3..6 million. Internet and engineering and bank automation. This firm employs 9. Each partner in India has specializations and. The contractual relationship between Nortel and each of its partners is structured individually. For firms in North America. Nortel began to commission larger and more complex development projects requiring more sophisticated hardware and communication infrastructure along with enhanced interaction between Nortel and Indian teams. offshore development and branded software products. a division of Wipro Infotech.3 million. of which 5 per cent was spent on R&D. Infosys Technologies (Infosys) and Wipro Systems (Wipro). In 1993-1994 it had over 2.800 people and had a turnover of $201 million in 1996-1997. Gradually. Nortel remains the director of the network. Initially projects on which Nortel’s Indian partners worked were based on hierarchical. such as digital switches and large-capacity (2 gigabytes) dedicated lines for communication between Nortel and its Indian partners. Established in 1989. Both Nortel and its partners hope that the relationship will evolve into a full two-way partnership. it has moved to establish R&D activities abroad. The Nortel network Nortel is a leading telecommunications firm from Canada which specializes in developing technology for digital networks. Its turnover in 1996-1997 was $37. 30 . due in part to the shortage of skilled manpower.5 billion. of whom 250 are engineers. is a software development company with a focus on software services in the areas of distribution. 37 per cent of which emanated from outside North America. The firm employs 300 people. telecommunications. the four Indian partners duplicate Nortel’s lab in Ottawa. The allocation of projects to each partner by Nortel is governed by Nortel’s overall strategy to map disciplines across partners and avoid overlap. In 1989. finance.8 million. collectively. it develops tools and services for the design of semiconductors. Learning opportunities arose especially through exchanges of experts between Nortel’s research facilities in Canada and partner sites in India. Its revenues in 1997 were $15. SAS is the smallest of the four firms. (Nortel alone annually absorbs more than a quarter of Canada’s total output of software engineers and programmers. insurance.

$93 million in chemicals. 1996). Initially contracted for computer-aided design services.Chapter I (Box I. Department of Commerce. the Indian partners have rapidly gained experience and knowledge in the design of telecommunications software.are already present in India. see Gray and Rugman. SAS has thus moved to the development and design of prototypes of their own to meet future development needs at Nortel. though there are several evaluation methods for deriving the values. For the world’s largest 100 TNCs (see chapter II). the average size of assets was $298 million in motor vehicles. Data from Japan’s Ministry of International Trade and Industry on Japanese TNCs and their foreign affiliates suffer from a range of problems (Ramstetter. $37 million in textiles and $24 million in agriculture (United States. concluded) With one of these firms. while United States small and medium-sized TNCs own $34 million in assets per foreign affiliate (Fujita. that all TNCs. 1994. trade credit and debt securities due to direct investors. 1998). It should be noted that the United States survey data exclude foreign affiliates whose assets. the market for which is expected to grow dramatically in India in the immediate future. the average size of foreign affiliate assets amounts to $180 billion. Germany. regardless of nationality. 1996). Its use implies the following assumptions: first. sales or net income are less than $3 million. compared to $111 million for surveyed (non-bank) foreign affiliates in 1994 (United States. and Bellak and Cantwell. credibility in the telecommunications area has been enhanced for Nortel’s Indian partners and with it their ability to attract new customers. 1996). sales and exports everywhere in the world. Department of Commerce. Nortel’s interest in India also grew from its search for opportunities to adapt its technology for the Asia-Pacific market. FDI stock measures the value of share capital and reserves attributable to direct investors. Its principal international competitors -. AT&T and Ericsson -. 1997a). implying that one unit of FDI produces the same size of value added. Nortel’s alliance with the four Indian firms thus provides Nortel with access to the inexpensive software development resources of India at the same time as it allows it to enter the Indian market with products specially designed for India. Notes 1 2 3 4 These estimates are obtained by using data on these variables available for the foreign affiliates of a limited number of countries (France. This has enabled it to develop solutions for digital communications. Alcatel.3. SAS has redefined its core competence as digital signal processing. It also includes retained dividends and loans. Average asset size also differs in keeping with the size of the parent company.Siemens. The OECD recommends that the FDI stock be measured in market value rather than in book value from the balance sheets of investors reported on a historical cost basis (OECD. It should be noted that the average size of foreign affiliates is different from industry to industry. that the effects of FDI are uniform in all regions as no host-country differences are considered. the World Investment Report continues to use it in the absence of a better alternative. One of the problems is that data on sales (as well as other operational variables) are considerably inflated by the inclusion of sales by wholesale affiliates 31 . the shift from a one-way to a two-way partnership is well advanced. Through their relationship with Nortel. Although there are a number of problems in this methodology. Italy. 1998). Re-evaluation of FDI stock by various methods results in different stock figures that may lead to different and sometimes misleading interpretations of FDI situations (for example. Japan and the United States) or a combination of one or more of the countries depending on the variable and extrapolating them on the basis of the relative share of these countries in the worldwide FDI stock. In addition. with specific emphasis on multimedia technologies. If these omitted affiliates are included the average size of (non-bank) foreign affiliates was $83 million. The figures are based on firms in all industries. and second. In the case of foreign affiliates of United States TNCs. broadly behave in a similar manner no matter where their foreign production takes place.

net exports (exports less imports).S. Department of Economic and Social Development. Direct investors take profitability into account when making the locational decisions that influence the pattern of FDI inflows. 1997a). licence fees. Ministry of International Trade and Industry. the countries in transition of Central and Eastern Europe. Of course. see “definitions and sources” in annex B of this Report. BEA News Release. rather than total exports should be considered. 1998a). businesses continued at high level in 1997". The real GDP growth rate of the world economy is expected to fall from 3. in reality. inflows and outflows of FDI should balance but. while a small decrease is also expected in the United States and Latin America (UNCTAD. including Japan. Inflows into the United States. it is not always possible to distinguish between FDI-related payments and payments for technological services. A significant decline is forecast for Asia. In terms of contribution to GDP and the balance of payments. was caused mainly by the revision of the United States outflows data to exclude (non-permanent) FDI in financial intermediaries in the Netherlands Antilles and other economies. 18). Department of Commerce. These numbers do not include the countries that have negative inflows and for which the data on gross fixed capital formation are not available. Export-Import Bank. Financial Times. According to the data on foreign affiliates of United States TNCs. 1998a). Financial Times Survey. 1997a). “Foreign investors’ spending to acquire or establish U. and different methods of data collection and reporting between home and host countries. 1998a. patents etc. The decline in FDI outflows in 1996 (which had not been reported in World Investment Report 1997 (UNCTAD. in the group of developing countries. Ministry of International Trade and Industry. 30 April 1998. 1998).) The stabilization of exchange rates in this area is one of the reasons Japanese firms are increasing their FDI in the European Union (Japan.1 per cent in 1998. The relative importance of FDI in terms of gross fixed capital formation may also reflect. “US mergers and takeovers set record in first 6 months”. In fact. Sales through wholesalers of goods produced by other affiliates are likely to be included in sales of wholesale affiliates. in addition. outflows of FDI may reflect worldwide trends more accurately (United Nations. p. Due to the fact that a number of developed home countries (which account for the bulk of FDI outflows) have better FDI data collection systems. therefore. The reduction of transaction costs inside the single currency area and greater price transparency may facilitate and accelerate capital flows and cross-border M&As. Small decreases in FDI outflows are expected to be recorded in the Republic of Korea and Japan. foreign affiliates also import. including different treatment of reinvested earnings by home and host countries. Malaysia and the Republic of Korea in 1998.htm).Tr World Investment Report 1998: Trends and Determinants 5 6 7 8 9 10 11 12 13 14 15 16 whose data may be double-counted.gov/bea/newsrel/ fdi97. Bureau of Economic Analysis. 30 June 1998. 1992a).despite the fact that inflows in the first quarter of 1998 declined by 12 per cent over the previous period on a seasonally adjusted basis and by 3 per cent over the same period in 1997. 32 . 10 June 1998. tables 2-21-13 and 2-22-13). by a margin of $10 billion in 1995 (Japan. due to at least one large acquisition -.bea. the largest host country in the world. from the Web site of United States. In principle. the average value of sales was $84 million (Japan.) Cross-border M&As by United States firms in the first half of 1998 reached half the size of the total in 1997 (William Lewis. between affiliated enterprises could be influenced by profit and tax considerations. Data are available only for Japanese foreign affiliates: they imported more than they exported in manufacturing. they do not. Department of Commerce.) See “definitions and sources” in annex B of this Report. the import propensity of foreign affiliates is relatively high. The World Bank includes. United States outflows in the first quarter of 1998 decreased by 13 per cent over the previous period (seasonally adjusted) and declined by 4 per cent over the same period in the previous year. If only manufacturing affiliates are considered. based on FDI reported for certain months of 1998. (For further details.doc. Department of Commerce. Payments for royalties. (Data are provided by the United States. (See “Birth of the Euro”. are most likely to rise. Information on FDI in 1998 is still limited. There are several reasons for this discrepancy. Bureau of Economic Analysis (www.of Chrysler by Daimler-Benz worth $38 billion -.2 per cent in 1997 to 2. the relative level of income generated in each region. affiliates in all developing regions (including West Asia) show a higher income-sales ratio than do those in developed regions (United States. while inflows are expected to decline in Indonesia.

and Daimler-Benz merged with Chrysler and also established a joint venture with Swatch. that is. Honda. Derived from the MERIT/UNCTAD database. p. Ford and General Motors (United States). Italy. BMW. and Daewoo and Hyundai (Republic of Korea). those that involve the long-term position of firms or products. “Global business outlook”. Mass market assemblers bought up-market companies (figure I. Daimler-Benz and Volkswagen (Germany). the share of FDI outflows to the European Union rose from 41 per cent in 1996 to 84 per cent in 1997 and for the latter. the share of FDI going to the European Union increased from 48 per cent in 1996 to 50 per cent in 1997. and the sign of the coefficient indicates the direction of this relationship. Portugal and the United Kingdom for 1997. “Global business outlook”. Pfizer (United States).Chapter I 17 18 19 20 21 22 23 24 25 26 27 As of mid-1998. Japanese firms too prefer greenfield projects or minority M&As: only 12 per cent of Japanese affiliates abroad had been established through M&As as of 1995 (Japan. the number will be 14 in 1998. 16 March 1998. The coefficient range is from -1 to +1. Denmark. They are Merck (United States). cit.14): Volkswagen acquired Audi and Porsche and Ford took over Aston Martin and Jaguar. With the expected merger between Chrysler and DaimlerBenz. Glaxo Wellcome (United Kingdom). Germany. The year 1996 showed an increase of nearly 20 per cent in FDI. Judging by outflow data for Belgium. PSA and Renault (France). growth of outflows excluding this component was only 10 per cent. 33 . op. At the same time. from 30 per cent to 49 per cent (based on UNCTAD FDI/TNC database). Financial Times Survey. only some European Union member states had reported outward FDI data for 1997 by destination. but this was mainly caused by the inclusion. Currently. luxury car manufacturers spread their own range towards lower-end vehicles of the market: BMW bought Rover. 13 January 1998. IV. Spearman’s rank-order coefficient is a nonparametric version of the Pearson correlation coefficient based on a rank ordering of the data rather than on actual values. the major 15 are: Chrysler. Belgium and Portugal showed significant increases in the share of intraEuropean-Union FDI: for the former. Nissan and Toyota (Japan). Novartis (Switzerland). 1998a. Roche (Switzerland) and American Home Products (United States). Volvo (Sweden). In particular. The absolute value of the correlation coefficient shows the strength of the relationship between foreign assets and inter-firm technology agreements. table 2-27-13). The MERIT/UNCTAD database includes only strategic inter-firm technology agreements. “Pharmaceuticals”. for the first time. It was developed at the Maastricht Economic Research Institute on Innovation and Technology (MERIT) of the University of Maastricht and modified by UNCTAD. of reinvested earnings. Financial Times Survey. Information provided by Gendai Advanced Studies Research Organization (Tokyo). Bristol Myers Squibb (United States). The analysis excludes 15 cases for which no alliances were found in the MERIT/UNCTAD database. Ministry of International Trade and Industry. Fiat (Italy).

Tr World Investment Report 1998: Trends and Determinants 34 .

The rankings otherwise remained fairly stable among the top ten in the list. the list of the top 100 TNCs had included for the first time two TNCs from developing countries -Petróleos de Venezuela S. The 1996 list of the top 100 TNCs includes ten new entrants (table II.2) and ten exits (table II. Most of the 1996 entrants already occupied a position in the vicinity of the top 100 in 1995. these companies strengthened their respective positions by moving up from 88 to 73 and from 52 to 43. in 1996. and most of the firms no longer included in the list are now ranked between positions 100 and 120. as in the case of Novartis (Switzerland).A. In 1995.1). (Venezuela) and Daewoo Corporation (Republic of Korea). being replaced by Mobil Corporation (United States). Movement at the bottom of the list is also limited. though no other developing country firm has yet joined them. which took over Carnauld Metalbox (France). special situations arise when M&As involve firms with large foreign assets. Highlights In 1996. Crown Cork & Seal Company (United States). and Kvaerner (Norway). 3 5 . which acquired Trafalgar Plc. (United Kingdom).Chapter II CHAPTER II TRANSNATIONAL THE LARGEST TRANSNATIONAL CORPORATIONS CORPORATIONS world’s A. pushing Royal Dutch Shell (United Kingdom/Netherlands) into second place (table II. the top position in the list of the world’s 100 largest non-financial TNCs ranked by foreign assets changed for the first time in six years when General Electric Company (United States) moved from third into first position.3). The world’s 100 largest TNCs 1. The only major change was Nestlé (Switzerland) moving from ninth to eleventh place. However. which was formed through the merger of Sandoz and Ciba-Geigy.

3 12.3 95.9 12.9 84.4 45.1 28./dist.2 23.8 30.6 50.3 43.5 56.2 33.. e 51900 .9 46. Automotive Food/tobacco Chemicals Chemicals/pharmaceuticals Beverages Chemicals Automotive Automotive Diversified Trading 82.8 102.8 45. Automotive Computers Automotive Automotive Diversified Petroleum expl.6 38.4 39.8 69./dist.. e 90390 273000 67208 216000 39074 176000 118820 95000 . Total Foreign Total index inde x a (Per (Per cent) Employment Employment Country Countr y United States United Kingdom/Netherlands United States United States United States United States Japan Germany Japan United States Switzerland Switzerland/Sweden France Germany Germany Japan Italy Netherlands/United Kingdom Germany Netherlands Switzerland Germany France Japan France Switzerland United Kingdom United States Italy France United Kingdom United States France Canada Germany Japan Germany Japan Japan Electronics Petroleum expl.7 31.4 32.4 . d 24.3 35.3 147.8 33.0 117.1 79.6 45.8 44.A.2 69.0 89.2 17.9 60.4 80..9 .0 35.3 29.4 29.4 25.I.1 41.4 62.6 55.4 31.2 63..2 30. e 221313 121655 34837 123042 3819 22900 206125 203541 41600 94375 93708 .2 ./ref.4 33...4 30.6 32.1 258. d 29.4 124.0 95.6 31.) Rhone-Poulenc SA Seagram Company BASF AG Honda Motor Co. Roche Holding AG Siemens AG Alcatel Alsthom Cie Sony Corporation Total SA Novartis British Petroleum (BP) Philip Morris ENI Group Renault SA B. Ltd.8 75.6 51.3 36. Food Electrical equipment Petroleum expl.8 18. d 19.6 39.9 26.World Investment Report 1998: Trends and Determinants 36 able world’ orld’s by foreign Table II.9 62.7 20.0 50.1 71.2 47.2 Industry Industr y b Foreign Total Foreign Transnationality assets index indexa Corporation 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 83 32 75 22 85 52 79 49 71 38 3 2 47 14 34 57 74 8 70 11 9 56 36 40 19 20 35 62 81 69 31 68 30 1 42 46 43 77 82 General Electric Shell. e 91192 37750 94659 .5 75./dist.4 20.8 54..5 24.9 65./ref.1 42.3 52../ref.0 75.4 41.5 .2 128. e 42339 .2 56.4 97.3 64.6 .9 109.5 23..1.3 34..8 26.8 47.9 47.4 24. e .2 53.4 62.8 .6 28./ref..8 77. Chemicals Chemicals Automotive Automotive Food Automotive Electronics Pharmaceuticals Electronics Electronics Electronics Petroleum expl.0 46..2 63.8 79.9 87.. Pharmaceuticals/chemicals Petroleum expl. BMW AG Mitsui & Co.2 67.1 55.2 19.6 59./dist.4 .1 18.0 32. Ltd.0 27.1 81.5 42.8 16.4 38.. d .3 54.5 38.8 51.2 43.4 /.6 31.5 24./dist. e 43381 149217 34000 41818 ..2 19.5 222.V.8 25.7 34.4 127.1 70.5 56. FIAT Spa Unilever f Daimler-Benz AG Philips Electronics N.0 158..T.8 13.8 20.0 27.5 29..4 42.0 50.7 72./dist. d 21.0 26./ref.0 30.9 59..5 32.4 23.8 31. The world’s top 100 TNCs.2 87.8 12. ranked by foreign assets.1 56.1 61.4 34. e 1997 239000 101000 371702 79000 647000 240615 150736 260811 8794 43000 212687 214894 85400 142200 147862 135331 237865 304000 290029 262500 48972 379000 190600 163000 57555 116178 53700 154000 83424 140905 163854 97000 75250 31000 103406 101100 116112 11250 6684 30.2 70.2 43.9 18./dist.1 35.6 37.6 79.2 39..4 42.9 12.0 29. d 17.0 55. d 272.4 38.0 18. d 18.0 38..1 . Nissho Iwai Corporation ./ref. d 31.0 65.9 26..3 59. Industries Plc Du Pont (E.8 28.9 17.6 32.7 13.6 40.6 25. 1996 (Billions of dollars and number of employees) Assets Transnationality by Ranking by Sales Foreign 21.7 30.3 48.8 132.1 65.8 82.0 50.3 41.5 58.7 41. Royal Dutch c Ford Motor Company Exxon Corporation General Motors IBM Toyota Volkswagen Group Mitsubishi Corporation Mobil Corporation Nestlé SA Asea Brown Boveri (ABB) Elf Aquitaine SA Bayer AG Hoechst AG Nissan Motor Co.7 67.7 29.1 113.8 33.8 53.6 28.1 84000 79000 . Automotive Petroleum expl.0 44. Ltd..4 60.7 66. Food/tobacco Petroleum expl.3 30.3 96./ref.5 43.

6 15. 1996 (continued) (Billions of dollars and number of employees) Assets Transnationality by Ranking by Sales Foreign 40.5 28.0 17.4 17.5 58. e 29613 47200 11323 . Republic of Australia United States United States Germany Japan United Kingdom Canada United States France Japan United States Sweden Switzerland Canada France Australia Japan Japan Sweden United States United States United States United States Sweden United States United Kingdom United Kingdom United Kingdom United States Venezuela Japan United Kingdom United States France Japan Trading Electronics Chemicals/agribusiness Diversified Media Petroleum expl.4 24.7 23. d 14.4 9.7 43.4 9.2 8.7 14.1 20.5 28./dist.6 27.5 44.8 72.9 10.1 43.7 10.8 15.7 6.8 29.4 11. Procter & Gamble International Paper AMOCO Corporation Volvo AB McDonald’s Corporation Grand Metropolitan Glaxo Wellcome Plc BTR Plc Johnson & Johnson Petróleos de Venezuela S. Fujitsu Limited Hanson Plc Motorola.8 16.6 19. Chemicals Automotive Trading Telecommunication Printing and publishing Petroleum expl.. Sumitomo Corporation Electrolux AB AT&T Corp.A./ref.7 31...3 21.8 8..4 52.9 28.5 11.6 14.2 . Automotive Restaurants Food/beverages Pharmaceuticals Plastics and foam Chemicals/pharmaceuticals Diversified/trading Electronics Building material Electronics Diversified/utility Metal 15. The world’s top 100 TNCs.1 12.3 54. Générale des Eaux Nippon Steel Chapter II 3 7 .4 11.7 8.5 24.0 45.0 9. d 10.3 68.1 94.7 15.6 8.3 10.8 20..1 78.2 35.9 61.5 11.9 76.6 8.4 10.2 34.1 .4 /.7 113.2 25. d 13.1 20.9 11.9 10.4 14./ref. Rubber & plastics Electronics Photo equipment Electronics Construction materials Telecommunication Industrial material Metal Electronics Trading/machinery Electrical appliances Telecomm. e .7 18.0 14. e 31000 9290 26435 153000 55000 40209 .7 .0 7./dist.4 .2 50.9 14.5 17.2 8.5 12.6 37.6 33./electronics Chemicals/cosmetics Paper Petroleum expl.9 36.9 15.3 32. e .1 21.5 70.9 24.9 7.3 25.5 13.6 32..5 14.0 8.4 9.4 38.4 88.7 21.9 8.7 11...3 Industry Industr y b Foreign Total Foreign Transnationality assets index indexa Corporation 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 93 58 28 51 27 78 48 37 86 15 4 66 10 88 61 23 6 64 39 76 97 87 7 98 67 80 91 45 44 18 16 26 59 65 89 25 63 92 96 Itochu Corporation Hewlett-Packard Ferruzzi/Montedison Daewoo Corporation News Corporation Chevron Corporation Dow Chemical Robert Bosch GmbH Marubeni Corporation Cable And Wireless Plc Thomson Corporation Texaco Incorporated Michelin Matsushita Electric Xerox Corporation Ericsson LM Holderbank Financiere BCE Inc.9 8.7 44.2 27..8 18.6 .2 8.4 10.6 84.2 9.1 23.1.0 10..8 153. d 12.9 12.7 67. e .8 20.able world’ orld’s by foreign (continued) Table II.7 7.3 16.4 30..0 68.2 77. e 9766 122000 29564 47609 26513 40820 40300 172359 9282 37448 50500 28957 119780 270651 86700 93949 42970 121000 111701 60100 330100 9129 112140 130400 106000 87000 41723 71905 237000 65699 53460 115805 89300 59318 167000 56000 139000 217300 24527 25.4 6.3 23.9 28.4 21.9 24.1 14.6 47.7 62.8 17./dist.7 10.2 5.5 38.5 89. Total Foreign Total index inde x a (Per (Per cent) Employment Employment Country Countr y Japan United States Italy Korea..4 16.9 70.6 35.5 58.1 80.3 47.0 13.1 20.6 28.9 13.3 10. d 11.8 17. Saint-Gobain SA Broken Hill (BHP) Hitachi. d 66.1 26.2 14.9 44.9 49.4 15.3 10..9 42.8 26.2 11.1 36.1 27.0 28. e 50053 39122 46000 74467 20400 56400 2873 98220 .3 71.7 12.0 32.1 13.5 26. e .7 108.9 36.. ranked by foreign assets.7 30./ref.2 21.5 6.0 20.7 2584 48200 17570 37501 17212 12095 21039 .5 14.5 55.8 10.7 34.3 19.7 21. d 9.7 .6 13.1 45.4 11.8 46...6 62. e 47600 12756 53000 35000 63738 57433 ..0 12.0 14.4 18.2 15.0 5.8 12.3 55. Inc.0 20.4 43.3 60. Ltd.4 16.5 .3 12..

8 29.2 24.8 7. Danone Groupe SA Crown Cork & Seal Toshiba Corporation Kvaerner ASA Atlantic Richfield RTZ CRA g Mannesmann AG Pharmacia & Upjohn GTE Corporation American Home Products Eridania Beghin-Say SA Société au Bon Marché Source: UNCTAD/Erasmus University database.4 54. e .V.0 7.2 21.1 6.3 7. e 69303 . Data on foreign employment are either suppressed to avoid disclosure or they are not available.8 9.6 46.4 15. e 28300 14617 .2 6.4 15.4 4. e 9217 .1 18.8 11.6 7. In case of non-availability.3 14.2 4./dist./ref. Data on foreign assets are either suppressed to avoid disclosure or they are not available.6 12.6 67.8 40.3 61.8 53. e .1 25. .1 10. The world’s top 100 TNCs. Coca-Cola Solvay SA Mitsubishi Motors Northern Telecom Petrofina SA Bridgestone Pepsico.2 22.1 7. Pharmaceuticals Telecommunication Pharmaceuticals Food Beverages/luxury products 8.World Investment Report 1998: Trends and Determinants 38 able world’ orld’s by foreign (continued) Table II.9 12.8 7. Inc.5 92. foreign sales to total sales and foreign employment to toal employment.9 2.1 66.0 81..7 15..4 52. e 70700 126000 75628 30000 35400 74700 67584 13588 92458 486000 81579 44611 186000 80199 22800 51492 119703 31700 102000 59746 19340 22862 73. Foreign assets.4 47.8 7.6 16. foreign to total assets or similar ratios. d 7.0 7.0 14.9 7.8 9.6 9.1 10.2 14.5 11.4 8.3 8.8 5. Foreign sales are outside Europe whereas foreign employment is outside United Kingdom and the Netherlands.1 18.5 30.0 9.7 23.8 7.3 7.7 76.3 51.4 7.7 56..2 16.. e . ranked by foreign assets. they are estimated on the basis of the ratio of foreign to total sales.0 7.2 5..8 8./dist. Chrysler Corporation Canon Electronics Inc. e 55987 . they are estimated on the basis of the ratio of foreign to total sales.0 3.9 6.9 60.2 9.. e 31616 41689 .2 28.4 20. Mining Engineering/telecom.0 8.5 52900 26000 38197 20000 31413 18900 .4 12.0 31.3 44.8 8.5 19.1.9 Foreign Total index inde x a (Per (Per cent) Country Countr y Netherlands United States Japan United States Belgium Japan Canada Belgium Japan United States France United States Japan Norway United States United Kingdom/Australia Germany United States United States United States France France Chemicals Motor vehicles Electronics Beverages Chemicals/pharmaceuticals Automotive Telecommunication Petroleum expl.9 11.9 10.3 7.5 39.8 19.7 8.2 . In case of non-availability.6 12..3 8./ref. Foreign assets.2 24.6 71.0 9.0 4. foreign to total employment or similar ratios. Industry classification for companies follows the United States Standard Industrial Classification as used by the United States Securities and Exchange Commission (SEC).3 23.6 8..2 Industry Industr y b Foreign Total Foreign Foreign Transnationality assets index indexa Corporation 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100 21 99 55 29 5 90 13 24 53 84 50 41 94 12 95 54 73 33 100 72 17 60 Akzo Nobel N. d 8.6 15..7 8.8 18. sales and employment are outside the United Kingdom and the Netherlands.3 8. Rubber and plastics Beverages/food Food Packaging Electronics Shipbuilding/ engineering Petroleum expl.8 15.5 11.4 22. sales and employment are outside the United Kingdom and Australia. a b c d e f g The index of transnationality is calculated as the average of three ratios: foreign assets to total assets. 1996 (continued) (Billions of dollars and number of employees) Assets Sales Transnationality by Ranking b y Employment Employment Total 13.6 .8 26.3 80..9 9..2 21.2 38.4 8.

Chapter II able Newcomer wcomers world’ orld’s Table II.8 Country composition.in terms of foreign assets. as defined in footnote a) of table II. sales.8 ariable Variab le Foreign assets Foreign sales Foreign employees Median index of transnationality b Total 1 808 2 149 5 939 470 54.a by foreign ranked by foreign assets. 3 9 . and employment. foreign world's larg Figure II. The merger of Sandoz and Ciba-Geigy resulted in the new TNC Novartis. regardless of whether one considers number of firms. European Union firms have also seen their share of foreign assets and foreign employment decline. a U N C TA D / E r a s m u s U n i ve r s i t y Source: a b UNCTAD/Erasmus University database. 85 of the top 100 TNCs were headquartered in the Triad. Their dominance has remained roughly unchanged since 1990. 1995 6.M. although they still account for the largest number (39) in the top 100 list. foreign assets. Générale des Eaux Akzo Nobel Bridgestone Corporation Crown Cork & Seal Kvaerner ASA Eridania Beghin-Say Société au Bon Marché Country Switzerland Italy Sweden France Netherlands Japan United States Norway France France able Departures from world’ orld’s Table II.4) of the world’s 100 largest TNCs shows a continuous trend towards greater transnationality -.II. 3. Since the list a Measured by foreign assets. percentage and number of employees) Change Chang e 1996 vs. doubling it in Source: U N C TA D / E r a s m u s U n i ve r s i t y Source : UNCTAD/Erasmus University database. it has remained dominated by firms from the Triad (European Union.3 7.4 2.1. France and Germany alone accounted for three-quarters of the entries in both years. and thus in the overall transnationality index. Japan. the number of firms from the European Union declined between 1990 and 1996 (mostly from France and the United Kingdom).1. a snapshot (table II. The merger of Sandoz and Ciba-Geigy resulted in the new TNC Novartis. 4. Departures from the world’s top 100 TNCs. More specifically. This includes companies which could not be considered in 1997 because of late arrival of a response to UNCTAD’s questionnaire. Within the important five most important home countries.II. The United States. 1996 Ranked by foreign assets 26 42 55 77 79 87 90 92 99 100 Corporation a Novartis b Ferruzzi/Montedison Ericsson L. The change of the top 100 TNCs was first between 1995 and 1996 is expressed in percentage points. 1996 Ranked by foreign assets in 1995 38 84 85 90 93 94 97 98 99 100 Corporation Ciba-Geigy AGb Carrefour SCA Sara Lee NEC Corporation Thomson SA Imperial Chemical Industries (ICI) United Technologies RJR Nabisco Pechiney SA Country Switzerland France Sweden United States Japan France United Kingdom United States United States France Source: database. b In per cent. In 1996. published in 1990. compared to 86 in 1990. figure II. United States and Japan.4 3. whereas Japanese firms increased their share of foreign activities. Newcomers to the world’s top 100 TNCs. see also in the annex tables A. Snapshot of the world’s 100 largest TNCs.1. these were the principal developments: • able world’ orld’s larg Table II.1 and A.2). Overall. 2. 1996 Triad. b This includes companies that could not be considered in 1997 because of the late arr ival of a response to UNCTAD’s questionnaire. the United Kingdom.a by foreign ranked by foreign assets.a 1996 (Billions of dollars. The world's 100 largest TNCs: the sales or foreign employment.

5).4).3).1 trillion in 1996 (table II. The firm experiencing the largest increase in foreign sales was Hanson (United Kingdom) (figure II. whereas FIAT (Italy) experienced the largest fall in foreign sales (figure II. 1995-1996 (Percentage) foreign Figure II. For example. The number of Japanese firms in the list rose by 50 per cent between 1990 and 1996. Top 5 increases in foreign sales among world's the world's top 100 TNCs. A number of individual firms.5. This shrinking group is led by Volkswagen whose foreign assets fell by about a third between 1995 and 1996. • Foreign sales. Conversely.8 trillion in 1996 (table II.2. other firms saw their foreign assets shrink (figure II.4). and another three firms saw increases of 40 per cent or more. Total foreign assets of the top 100 TNCs amounted to $1. Source : UNCTAD/Erasmus University database. they had risen by around 30 per cent. have grown much faster (figure II. Total foreign sales of the top 100 TNCs amounted to $2. 1995-1996 (Percentage) Source : UNCTAD/Erasmus University database. Between 1993 and 1995.World Investment Report 1998: Trends and Determinants employment. Top 5 decreases in foreign assets world's among the world's top 100 TNCs. and a relatively slower rise in total sales. This rise. Top 5 decreases in foreign sales among world's the world's top 100 TNCs. Another three firms lost more than a fifth. the ratio of foreign assets to total assets increased marginally from 41 per cent in 1995 to 43 per cent in 1996. however.3. an increase of seven per cent from 1995. • Foreign assets.4.4). For all of the 100 TNCs. 1995-1996 (Percentage) foreign Figure II.2). followed by a slower growth of six per cent between 1995 and 1996. Top 5 increases in foreign assets world's among the world's top 100 TNCs. foreign Figure II. 1995-1996 (Percentage) Source : UNCTAD/Erasm us University Source : UNCTAD/Erasmus University 40 . resulted in an increase in the ratio of foreign sales to total sales. foreign Figure II. TOTAL’s (France) foreign assets rose by an outstanding 53 per cent between 1995 and 1996. from 48 per cent in 1995 to 52 per cent in 1996. from 12 to 18.

Source: database.Chapter II Foreign sales of the top 100 TNCs grew faster than their foreign assets. Food and beverages also includes B. Top 5 increases in foreign employment world's among the world's top 100 TNCs. 4 1 . from 12.most of which are highly concentrated industries. as far as assets . automotive. five TNCs reduced their foreign employment by between 25 per cent to 57 per cent (figure II.1 million to 11. This suggests that. This pattern continued the trend of declining overall employment and rising foreign employment since the list was first published for 1990. Consequently.5. Total foreign employment of the top 100 TNCs amounted to some 5. No particular patterns in terms of home countries or industries appear to explain this performance. Firms operating in the electronic/ electrical industry make up the largest group in the top 100 (table II. Chemicals also includes Ferruzzi/Montedison.4).6. on a global level. During the same year. an increase of 2 per cent over 1995. Two other firms registered increases of over 100 per cent. • Foreign employment.T. and food/beverages industries -. Industry composition of top 100 TNCs. foreign employment Figure II.9 million in 1996 (table II.A. the reverse was true (table I. are concerned.8 million employees. smaller companies are expanding abroad faster than large ones. even if all TNCs are considered. petroleum and mining. total employment decreased by 3. the ratio of foreign-to-total-employment rose from 48 per cent to 51 per cent.7). The companies with the largest increase in foreign employment are led by Michelin (France) (figure II. 1995-1996 (Percentage) Source : UNCTAD/Erasmus University database.6).5). 1995-1996 (Percentage) foreign employment Figure II. They constitute usually half of the entries in this top group since the list for 1990 was first able Industry Table II. The top 10 TNCs among the top 100 have been dominated by TNCs from the automobile and the petroleum industry.1).5 per cent. U N C TA D / E r a s m u s U n i ve r s i t y • Industry composition . Top 5 decreases in foreign employment world's among the world's top 100 TNCs. On the other hand. Industries (tobacco) and McDonalds.7. They are followed closely by TNCs from the pharmaceutical/chemical. 1990 and 1996 (Number of entries) Industry Electronics/electrical equipment Chemicals and pharmaceuticals a Automotive Petroleum refining/distribution and mining Food and beverages b Diversified Telecommunication Trading Machinery & engineering Metals Construction Media Other Total 1990 14 18 13 13 9 2 2 7 3 6 4 2 7 100 1996 17 16 14 14 12 4 5 4 2 3 3 2 4 100 Source: a b UNCTAD/Erasmus University database.

the number of firms from the chemical/pharmaceutical industry was reduced from 18 to 16. respectively (annex table A.7) have banking entities in a considerable number of developing and transition economies. however.as well as in the Republic of Korea. one might well arrive at a different picture. respectively (annex table A.II. 42 .II.Hong Kong. Of course. Germany and Japan is inflated by the availability for the United Kingdom and the United States of figures for representative offices (and. their balance sheets show exclusively financial assets. forthcoming. amongst others. The region with the smallest presence of OECD banks is Latin America. Amongst the developing and transition economies. figures for agencies as well a).World Investment Report 1998: Trends and Determinants published. but this impression may at least partly reflect the incompleteness of data for that region. subsidiaries. as well as for other transition economies.II. In the case of banks. But financial services firms do not easily lend themselves to inclusion in such lists.are host to the largest number of banking entities from the OECD countries: 108 and 87.4). It should be noted that the list of the top 100 is dominated by manufacturing and primary sector firms. statistics on the international distribution of banking entities (i. banks from the Republic of Korea have the largest number of entities in the OECD countries covered (76). the figures are inflated in relation to those of Asia and Latin America by the inclusion of representative offices -. at least with regard to the number of banking entities in major markets. Statistics that could answer these questions are only beginning to emerge. and vice versa. an “agency” is defined as “any office or any place of business of a foreign bank located in any State of the United States at which credit balances are maintained incidental to or arising out of the exercise of banking powers. These lists also contain a number of services firms. The metal industry reduced its entries in the list from six to three for. This distribution by industry of the top 100 has not changed significantly since 1990. In the United States International Banking Act of 1978. The principal use of agencies is for the financing of. branches. The principal exceptions are the electronics/electrical industry (which increased the number of its entries from 14 to 17). even when compared with the foreign presence of banking entities from OECD countries. Not surprisingly.7).for which.e. while the food and beverages firms increased their number of entries from 9 to 12 .II. similar reasons. whereas assets of manufacturing firms are largely of a real nature. but banks from Brazil are represented in the largest number of OECD countries (10) (annex table A. All other industries are represented with at most five entries in the list.6). although the latter are transnationalizing as well (box II. for example. and provision of other services related to. Not unexpectedly. respectively (annex table A. To assess the spread of banking. Conversely. They show that banks of selected (major) OECD countries (annex tables A. Source: a Cornford and Brandon.II. those from developing economies as well as from economies in transition have already achieved a considerable international presence. 1989). But there are also large presences from OECD countries in the Czech Republic and the Russian Federation . Box II.5). checks are paid. the largest presence of banks from developing countries and transition economies in the OECD area is found in the United States and the United Kingdom -.II. However. two financial centres -. The international spread of banking The transnationalization of manufacturing firms is captured by the lists of the top 100 TNCs and top 50 TNCs based in developing countries. if data were available on the transnationalization of banking assets and the sizes of the assets of different banks. China. international trade between the host country of the agencies and the country of their parent banks. and indeed have been doing so for some time (Fujita. for the latter. and Singapore -. The comparability of sales figures is even more complicated as it touches the question of the value added by banking services. representative offices) based on publicly accessible sources have been used. following the trend of concentration particularly in the pharmaceutical industry. although incomplete and no more than partially illuminating about the transnationalization of the banking industry. the scale of this presence in relation to that in France. suggest that. The data.1. and financial services are not included. Japan and the United States have the largest presence of banking entities in developing and transition economies: 116 and 113.1).4 to A. or money is lent but at which deposits may not be accepted from citizens or residents of the United States” (sections 3101 to 3107). Services are under-represented.171 and 153.

A high value of this index.8. A transnationality index. The conceptual framework underlying this index (and other similar indices) is based on the dichotomy between foreign versus home country activities. A drawback of this index is that it does not take into account the size of the home country and does not distinguish between TNCs whose foreign activities are concentrated in a few foreign countries. annex table A.Chapter II Below the surface of a slowly progressive transnationalization of the top 100 TNCs a diverse picture emerges. Nestlé Source : UNCTAD/Erasm us University Box II. until then it had not changed significantly since 1990 (figure Avera verag index Figure II. 2. in fact between 1990 and 1993. /. particularly if accompanied by low levels of inward investment. While this represents an increase of 4 percentage points over 1995.II. 1990-1996 that index had even decreased. However. when the range was 97 for Nestlé to 15 for General Electric. this is quite similar to 1990. For a TNC. 4 3 . The main drawback of this approach is that the index does not take account of the magnitude of a company’s activity in a given host country: each host country is counted once.2).8). Degree of transnationality The degree of international involvement of a firm can be measured in various ways (box II. foreign sales/total sales and foreign employment/total employment. and helps to assess the degree to which the activities and interests of TNCs are embedded in their home economy or in economies abroad.g.a At the level of a corporation.4). For the top 100 TNCs as a whole. sales and employment for each host country. or a combination of ownership and internalization advantages with a broader portfolio of locational assets. The overall index hides a number of variations. An approach that measures this dimension of transnationality is captured in the network-spread index. sales and employment located in it. but it may also indicate high levels of ownership advantages as well as high levels of knowledge of market conditions in many countries. The index of transnationalization used here is a composite of three ratios -foreign assets/total assets. In 1996. a high network-spread index can be an indicator of both negative and positive elements. as corporations do not regularly report assets. even for the individual corporation. may raise questions about a home country’s locational advantages.. by choosing a single key variable (like assets) or by combining several variables (assets. 2.8). The growing internationalization of assets has contributed the most to the increase in the transnationalization index (TNI). which is constructed precisely to reflect the number of host countries in which a firm is established. industries and individual firms performing often in quite different ways. The WIR uses the latter method (approach I. the transnationalization index ranged from 97 per cent for Seagram to 16 per cent for GTE in 1996. and TNCs whose activities are spread across numerous host countries. Measurement of transnationality Transnationality is a function of the extent to which a firm’s activities are located abroad.. can be compiled in different ways. a high value could also indicate strong international competitiveness on the part of the home country firms. Average transnationality index of II. under certain circumstances. however. with home countries. the value of world's larg the world's 100 largest TNCs. This diversity is also visible when it comes to the degree of transnationality of firms and industries. This drawback cannot easily be remedied. employment and sales). a high network-spread index may be accompanied by higher costs of managing farflung operations (transaction costs). independently of the amount of assets. e. The value of this index for the top 100 as a group was 55 per cent in 1996 (table II.

N* is chosen to be the number of countries in the world that have inward FDI. the average transnationality index ranges from 81 per cent for construction and construction materials to 35 per cent for services and trading (annex table A. 2. the age and experience of firms in foreign markets. The corresponding value of the network-spread index for services and trading is 30 per cent and for construction and construction material is 17 per cent. Volkswagen. approximations of the importance of taking advantage of a portfolio of locational assets -. At the industry level. Furthermore. N* is estimated as the number of countries that are in receipt of inward stock of FDI minus 1 (to exclude the home country of the TNC). It should also be noted that the actual values in the indices used are also influenced by a number of factors that are not taken into account in their calculation. the United States and Japan. and thereby a significant degree of transnationality.in this case -. it would score very high (100 per cent) on the network-spread index and quite well (50 per cent) on the transnationalization index.an important source of the competitiveness of firms in a globalizing world economy (UNCTAD. The index N/N* is the network-spread index. they do not exhibit a broad geographical spread. Accordingly. sales and employment.II. indices calculated on a regional basis -. The differences in the values of the two indices suggest that. that country has the highest value for the network-spread index (annex table A. 144 TNCs ranked 23 per cent in 1993 (Dunning. the highest degree of transnationality and the widest spread of activities is found in TNCs originating in smaller economies and/or in economies that have a long history of outward FDI (the Netherlands. potentially. and the extent to which firms take advantage of economies of scale and scope and can substitute trade for FDI.II. than that it reaches a high value in the network-spread index. the extent and pattern of regional integration and liberalized entry provisions for FDI.10). Conversely. More generally. The importance of foreign assets. Nissan and McDonald’s). the company could have located affiliates. on the basis of the data in the WIR 97.for the international competitiveness of firms.. forthcoming.World Investment Report 1998: Trends and Determinants (Box II. Both indices are. p. say. concluded) A correlation analysis of the transnationalization index and the network-spread index for the top 100 TNCs yields a rather low rank-correlation coefficient (0. while the top 100 TNCs are quite transnationalized. N* is equal to 178. Given that TNCs investing abroad typically direct their investments towards major markets and not necessarily at every market.II. sales and employment captured by the transnationalization index is complemented by the extent of geographical diversity captured by the network-spread index. a company could have warehouses in each of the world‘s economies amounting to half of its assets. e. One indicator that has been used in this respect is R & D. it is more likely that a TNC reaches significant shares of foreign assets. In no industry is the network-spread index higher than the transnationality index. Source: Ietto-Gillies. 44 .b In sum. rank very low on both the transnational and network-spread indices (annex table A. This might well be an advantage in the age of globalization.quite limited.9).II. firms from smaller economies seem to rely on geographically more diversified corporate networks. Netherlands-based TNCs operate in the highest number of countries and.II. It should be noted that both the transnationalization index and the network-spread index provide only for an imperfect and broad indication of the “depth“ of a TNC‘s involvement abroad. Such suggests that the large size of these countries’ domestic economies may have allowed their TNCs to realize some of their competitiveness and growth potential at home.8.assuming data availability -. United Kingdom. the transnational index and the network-spread index capture different aspects of a corporation’s transnationalization.g.11). its degree of integration into the host economy is -. Switzerland and Sweden). correspondingly. examples are firms such as Seagram. therefore they provide information about the comparative international competitiveness of firms. In addition. For instance. the size of the home market. reflecting a phenomen also observed at the aggregate level. TNCs from two of the most important home countries. To capture the depth of the transnationalization process requires the development of additional indices. In practice. 50 per cent on the transnationality index than that it invests in half of the world’s economies. In other words. the number of foreign countries in which.would probably capture the geography of a firm’s expansion more accurately. it is more likely that a firm reaches. At the same time.11). annex table A. This underlines the fact that TNCs can transnationalize considerably without having to spread their foreign assets extensively (see annex table A. On an index developed for this purpose. Exxon. 1995a) -. in a sense. An index in percentage terms (and thus comparable to the transnational index) is derived by taking N as a percentage of N*.40.5). as well as on a higher degree of transnationality to stay competitive and to compensate for smaller home markets. a b The number of countries in which a company has foreign affiliates is denoted as “N”. 1996. The average number of countries in which the top 100 TNCs in a particular industry operate ranges from 54 for food and beverages (including tobacco) to 31 for trading and construction.

countries with a GDP of less than $ 500 billion in 1996.9. This is representative of a wider phenomenon (table II.e. The top 5 falls in transnationality world's larg among the world's larg est TNCs. 1995-1996 (Percentage points) Source : UNCTAD/Erasmus University database. i. Table II. Source: database.7). Sweden and the Netherlands. the average transnationality index of the top ten firms from small countries increased from an already high 77 per cent to an even higher 79 per cent. Belgium. 4 5 . Figure II. Over the 1990-1996 period. able world’ orld’s transnationality.7 87.1 95. The top 5 rises in transnationality world's larg among the world's largest TNCs. the average transnationality index for the top ten firms located in larger countries decreased from around 54 per cent to around 49 per cent (table II.0 84.9 92. 1996 by Ranking by Transnationality Foreign assets index inde x a Corporation Seagram Company Asea Brown Boveri (ABB) Nestlé SA Thomson Corporation Solvay SA Holderbank Financiere Electrolux AB Unilever Roche Holding AG Michelin Country Countr y Canada Switzerland/Sweden Switzerland Canada Belgium Switzerland Sweden Netherlands/United Kingdom Switzerland France Industry Industr y Beverages Electrical equipment Food Printing and publishing Chemicals/pharmaceuticals Construction Electrical appliances Food Pharmaceuticals Rubber & Plastics Transnationality index inde x a (Per cent) 97. U N C TA D / E r a s m u s U n i ve r s i t y The list of the leading ten TNCs by degree of transnationality (table II.8 88. The world’s top 10 TNCs in terms of degree of transnationality.10. such as Switzerland.7): firms with the highest transnationality index. The index of transnationality is calculated as the average of the ratios: foreign assets to total assets. Solvay. foreign sales to total sales and foreign employment to total employment.10). Unilever and Roche come from small countries.6). The ten TNCs with the highest transnationalization index show values of between 85 and 97 per cent. 1995-1996 (Percentage points) Figure II.Chapter II lost its leading position in transnationality to Seagram (table II. A number of firms (led by Hanson of United Kingdom) saw considerable rises in transnationalization (figure II. a Canadian beverages company with interests increasingly geared to the entertainment and publishing industries. During the same period.6) is dominated by firms from small industrial countries.6. Nestlé.2 89. Electrolux. while others (led by Volvo of Sweden) experienced declines of up to 15 percentage points (figure II.9 1 2 3 4 5 6 7 8 9 10 34 12 11 50 83 56 62 18 21 52 Source : a UNCTAD/Erasmus University database.9).3 96.1 87.3 94. Companies whose transnationality index changed very little during 1990-1996 include Saint-Gobain (France). such as ABB.

1996 verag Avera g e transnationality Industry Industr y Food and beverages Chemicals and pharmaceuticals Miscellaneous Electronics and electrical equipment Oil. All indications are that the forces of globalization will lead to an increase in the degree of transnationality of firms (box II.7. The transnationality index of the top five electronics and pharmaceutical firms hardly changed. Sweden.a 1990 and 1996 (In percentage of top 100 total) Source : UNCTAD/Erasmus University database. 46 . Norway.3).7 7. industry by industry. Republic of Korea (there was no entry in 1990).g. Food and beverages (67 per cent) tops the list.3 62.World Investment Report 1998: Trends and Determinants Daimler-Benz (Germany). New Zealand (was no entry in 1996).2 65.1 100 67. Belgium. by Ruigrok and van Tulder in 1995 (figure II. Switzerland and Venezuela (no entry in 1990). trading (29 per cent) is at the bottom.808 Source : UNCTAD/Erasmus University database. United States. too. the foreign assets’ share of total assets is very low (for five of them.0 3. implying that the higher transnationalization-index ratings are mostly reached by foreign sales and employment shares. Japan. Nissho Iwai (Japan) and Hoechst (Germany).0 48.6 - Source : UNCTAD/Erasmus University database and OECD. Transnationality index for small and large home economies.8 Top 10 average 79. shows great variations (table II. The top five trading companies remain amongst the least internationalized.3 51 Top 10 average 77.7 54. the Netherlands.8 39.4 52.0 54. The industry picture. Chemical firms exhibited the largest gains.5 13. France. 1990 and 1996 (Percentage and number of entries) Number of entries Small a Large b Totals 21 81 102 c 1990 Average TNI 70.2 29. Unilever.7 46. e. Royal Dutch Shell are included in both catagories for the years 1990 and 1996. electronics the smallest.11 and annex table A. a Average. below ten per cent).1 4.0 50. Germany. petroleum and mining Telecommunications Automotive Diversified Trading TOTAL (Per cent) Foreign assets (Billion dollars) Foreign assets as per cent of top 100 f oreign assets 9.II. The degree of transnationality of the top five firms in all industries that are represented by at least five firms in the lists of 1990 and 1996 increased over the 1990-1996 period.8.1 47. a Only industries that have at least five entries and in which the same 5 top TNCs featured in the lists of the top 100 TNCs in 1990 and 1996. albeit unevenly and more modestly than has been suggested in some studies on the globalization of industries and firms. For some industries.8 19.11. able index for larg Table II. Average in transnationality index of the top 5 Avera verag index each industry TNCs in each industry.8 21.7 18. able Avera verag foreign Table II. Italy. whereas the top five petroleum firms (closely followed by chemical firms) have the highest transnationality index of all industries. United Kingdom.3).8 52.9 43. Figure II.0 53. Averages in transnationality and foreign assets. a b c Small (GDP of less than $ 500 billion in 1996): Australia.8).3 2. RTZ CRA is included in both catagories only for the year 1996.6 Number of entries 20 83 103c 1996 Average TNI 74. Large (GDP of more than $ 600 billion in 1996): Canada.8 a 171 247 141 357 331 50 381 73 56 1.

Panamerican Beverages (Mexico). compared with a minority in the early 1990s. Source: Invest in France Mission. from 34 per cent to 42 per cent in employment. between 1996 and 2002. Transnational integratiion (Percentage of responses received) Source: Invest in France Mission. Only 33 per cent of the respondents to the survey considered their companies “completely global” or “highly coordinated internationally” in 1990. from 36 per cent to 42 per cent in gross investment. topped the list in 1996: Orient Overseas International. The largest TNCs from developing countries The top two positions in the list of the largest 50 TNCs headquartered in developing countries. this proportion had risen to 56 per cent in 1996 and could reach 78 per cent in 2002. Daewoo (Republic of Korea) leads the list (table II. The 1996 top 50 TNC list includes twelve new entrants (table II. ranked by foreign assets did not change in 1996: as in 1995. the contribution of foreign activities to respondents’ business is expected to rise from an average of 47 per cent to 56 per cent in sales.10). As with the top 100 TNC list. independently of the size. Transnationalization indicators (Percentage of responses received) Box Box figure 2.11). 1998. B. mobility on the top 50 TNC list appears to be higher than on the top 100 TNC list. a rising number of companies will establish genuine transnational production and sales networks. overall. supplemented by about 100 direct interviews. 1998. sector and location of the TNCs. Ar thur Andersen and United Nations.Chapter II Transnationalization Box II. 4 7 . China. But. while the proportion of those considered “little coordinated internationally” had fallen from 67 to 22 per cent between 1990 and 1996 (box figure 2). More specifically. the company holding the top position last year. a company from Hong Kong. Ar thur Andersen and United Nations. from 35 per cent to 45 per cent in production.12). however. Transnationalization in the medium term A survey carried out between July and November 1997 among 300 managers of TNCs and international experts around the world. As a result. ranked second in 1996 (table II. suggests that the trend towards a further transnationalization of firms will continue in the medium term.3. replacing twelve exits (table II. followed by Petróleos de Venezuela (PDVSA) (Venezuela). changes in positions at the lower end of the list are also few. In the transnationality index. Box indicators Box figure 1. Further below.9). and from 32 per cent to 41 per cent in assets (box figure 1). LG Electronics (Republic of Korea) fell to rank 18 from 5 and was replaced by Sappi Limited (South Africa).

3 .0 2316.0 4385.1 16076.3 7968.1 16.0 45402.. Cemex S.0 3652./distribution 1876.1 61. .2 5116.0 7788./refin.0 2162.0 90.f 4997 2500 2139 22 4038 .0 1274.0 5259. e 8187.0 3241.f 31440 6466 2500 8982 33299 9762 43468 15757 59086 45000 Diversified/trading Petroleum expl.f 3994 4057 28000 65284 13640 11750 15483 221961 12966 27733 31400 13531 11955 4030 49900 8769 106900 27250 28544 14320 37.0 23456.4 13..0 4645.A.8 8404. Companhia Vale do Rio Doce China Shougang Group Singapore Airlines Hutchinson Whampoa Panamerican Beverages Guangdong Investment Fraser & Neave Limited Orient Overseas Intern.8 1178.6 ..0 7025.0 3761.1 890. .0 1567./refin. Petróleo Brasileiro S/A Petrobras Cathay Pacific Airways Samsung Electronics New World Development Hyundai Engineering & Construction Co. e 471.0 3010.5 36.0 836.0 Electronics 2083. China Brazil China Singapore Hong Kong.0 Diversifies/construction 2810.5 23 39 20 19 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 32 31 13 47 43 18 28 2 3 8 1 14 46 40 29 42 38 Daewoo Corporation c Petróleos de Venezuela S.7 16.f 573 15006 .f 140000 47609 59318 20527 52880 21055 44000 200000 by Ranking by Industry Industr y b Foreign Total Foreign Total Foreign Total inde x a index (Per (Per cent) 54. China Brazil South Africa g Taiwan Province of China Philippines Singapore Engineering/construction 2287.0 12084.1 3124.0 8901.1 39. LG Electronics Petroliam Nasional Berhad Citic Pacific Ltd.0 828 .0 1590.0 1718..0 1993. San Miguel Corporation Keppel Corporation 1461.0 14070.0 2023.9.3 36. .0 11605.d Hotel/construction 2321.8 4846. China South Africa g Taiwan Province of China Bermuda China China Chile Republic of Korea Argentina Brazil Hong Kong.5 44.0 Electronics .6 1327.9 1400.1 23219.6 25../motor vehicles/supplies 1678.4 Diversified/trading 3201.6 13478.4 1648.6 Energy/trading/chemicals 2693.1 Diversified 887.5 1508.0 8912.0 Electrical equipment .0 5080.5 2248.f 12122 10213 3396 .6 Mining 1599.0 9941..4 75..6 19.2 28. China Hong Kong.8 2061.6 71.8 Sales Employment Emplo yment Transnationality Foreign Transnationality assets index indexa Corporation 1 2 3 4 5 6 7 8 9 15 11 4 5 22 6 21 9 17 10 7 11 12 13 45 36 50 14 15 16 17 Republic of Korea Republic of Korea Malaysia Hong Kong.0 2468./distribution 2583.4 4743.9 329.7 3760./refin..0 10238.0 42094.3 28.0 . First Pacific Company Sappi Limited Acer Group Jardine Matheson Holdings China National Chemicals.0 768.4 .0 26758. d Beverages 903./distribution 2650.2 16.3 5122.3 30793.8 49.7 8002. & Exp. Imp.5 16.4 8174.0 /.. The top 50 TNCs from developing countries ranked by foreign assets.9 53.9 6456.0 Diversified/metals 1582.2 32504.8 Retailers .6 17955. .0 Transportation 1255.. 1996 (Millions of dollars and numbers of employees) Assets Country Countr y Republic of Korea Venezuela Mexico Hong Kong.7 3438.6 Beverages/hotels 959.2 15950 30889 72 8100 86 1623 2818 10500 . .0 1705.0 Miscellaneous 1392.A. Dairy Farm International Comp.3 36.0 Diversified .0 864.0 1882.2 Petroleum expl.0 Petroleum expl.0 58. China Singapore Hong Kong. (CTC) Sunkyong Group YPF S.0 6317.0 5937..0 4406. China State Construction Engineering Corp.0 25837.0 6630.5 4.2 6100.0 628. Corp.2 59.6 Trading/distr.4 26370.0 12413.2 6134.0 1032. Compãnia de Telecomunicaciones de Chile S. China Republic of Korea Hong Kong.0 31659.8 61.5 2008.World Investment Report 1998: Trends and Determinants 48 able from developing by foreign Table II. .. China Petroleum expl. Cervejaria Brahma South African Breweries Tatung Co.4 4532...9 Beverages 1357.6 81.0 2429.8 10302.6 46.0 .3 17891.1 17.9 4938.6 Utilities 2735.2 33736.0 16662.0 3699.1 Transportation 2555.7 25.5 3365.7 3978.0 8584.0 37501 12756 9783 37393 8744 .d Beverages 985.d Beverages 1436.0 2027.0 5730.6 Transportation 1574..d 3380. e 329.0 8491.3 6967./distribution Construction Electronic parts Paper Electronics Conglomerate/diversified 14933.7 12.8 7965.A. e 124.4 40. China Mexico/Panama Hong Kong.7 4151. .A. .. . .4 35..0 1306.6 6166.5 12.8 1342./refin.8 5271.0 33854. .

they are estimated on the basis of the ratio of foreign to total sales.. foreign to total employment and similar ratios for the transnationality index.0 1449.8 32.0 1386.9. Bavaria S.3 1328.0 51. In case of non-availability.0 311.f 1449 1300 140 3126 109 891 .0 421. In case of non-availability.f 6222 7932 4274 2972 2002 10533 1288 36421 6583 4083 16778 29975 5957 9876 8389 13788 12160 30740 33428 13031 10294 19300 25.1 79..0 1174. foreign to total assets and similar ratios for the transnationality index.0 392.2 .0 390.0 343.4 1045. a b c d e f g The index of transnationality is calculated as the average of the three ratios: foreign assets to total assets.e 47.V. Within the context of this list South Africa is treated as a developing countr y. .0 17.9 2128. they are estimated on the basis of the ratio of foreign to total assets.A. The top 50 TNCs from developing countries ranked by foreign assets.0 560.0 6746.8 3386. .9 Source: UNCTAD/Erasmus University database. they are estimated on the basis of foreign to total sales.9 372. China Brazil Chile Malaysia Mexico South Africag Mexico Colombia Chile South Africa g Diversified/trading Diversified Construction Retailers Chemicals Food Hotel/property Diversified Petroleum expl.2 8. In case of non-availability. 1996 (continued) (Millions of dollars and numbers of employees) Assets Transnationality by Ranking by Sales Foreign Total Foreign Total index inde x a (Per (P er cent) Employment Emplo yment Country Countr y Industry Industr y b Foreign Total Foreign Transnationality assets index indexa Corporation 35 33 China National Metals & Minerals Import & Expor t Corp . Industry classification for companies follows the U.0 3937. Hongkong And Shanghai Hotels Souza Cruz S. foreign to total employment and similar ratios for the transnationality index.2 477.1 10611.0 16. Data on foreign sales are either suppressed to avoid disclosure or or they are not available.0 801.6 18. . Barlow Limited Vitro S. Data on foreign employment are either suppressed to avoid disclosure or they are not available.1 4950.A.A.5 5440.0 1766.4 602.0 1591../refin. Standard Industrial Classification which is used by the United States Securities and Exchange Commission (SEC). automotive & furniture 884.0 2136. 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 30 24 25 49 41 26 34 48 12 16 27 44 37 35 10 Plate Glass & Shatterprufe Ind.9 726.d 804. Data on foreign assets are either suppressed to avoid disclosure or they are not available.0 3086.3 182 8132 .0 559.4 2072. Wing On Company Reliance Industries Sadia Concordia S.0 472. Compãnia de Petróleos de Chile Malaysian Airline Berhad Gruma S.0 625.7 7.3 1557.1 34.6 20.9 19.0 1752.0 552. de C.0 64..8 5705. foreign sales to total sales and foreign employment to total employment.2 451. Empresas CMPC S.A.8 53.0 758.0 609.A.5 554.0 2123.0 2997.9 29.0 5120.5 1607.0 2891.A. China Malaysia Republic of Korea Hong Kong.S.5 1282. Sime Darby Berhad Dong-Ah Construction Ind. China India Brazil Hong Kong.6 2431.7 16.0 . Data for some important mining companies were not available.7 26.7 626./distribution Transportation Food Diversified Miscellaneous Beverages Pulp & paper Building.0 2198. Chapter II 4 9 .0 5294.2 43.6 833.1 29.0 3523. .able from developing by foreign (continued) Table II.0 2388.0 522.4 4312.2 773. Consolidated data are provided.8 2958.

a 1996 by Ranking b y f oreign assets 9 13 15 18 33 35 40 43 45 46 47 50 Country Countr y South Africa b Chile Republic of Korea Malaysia Singapore Hong Kong.S. Corp. Panamerican Beverages Guangdong Investment First Pacific Company Sappi Limited Country Countr y Hong Kong.11. and. 50 . by Mexico and Brazil. a b This includes companies that could not be considered last year because of late arrival of a response to UNCTAD’s questionnaire. China Metals and Minerals Genting Berhad China Shougang Group Creative Technology Ltd.a 1996 • Country composition .4 75. the Republic of Korea. Snapshot of the top 50 TNCs from able from Table II. Petroliam Nasional Berhad Singapore Airlines Orient Overseas Intern. Industry classification for companies follows the U.2 16. Transnationality index inde x a (Per cent) 90.1 14.13) of the 50 largest TNCs from developing countries shows a continuous trend towards greater transnationalization: Table II. Within the context of this list South Africa is treated as a developing country. Since the top 50 TNCs list was first published in 1993.V. it has been dominated by firms from a few countries. The top 5 TNCs from developing countries in terms of degree of transnationality.13. mainly Hong Kong. China India Brazil Chile Malaysia Colombia South Africa b Corporation China State Construction Engeneering Corp. Reliance Industries Souza Cruz S. Source: a UNCTAD database.. Departures from the top 50 list of TNCs from developing developing countries. China South Africa c Industry Industr y b Transportation Beverages Miscellaneous Electronic parts Paper Source: a b c The index of transnationality is calculated as the average of the three ratios: foreign assets to total assets. Their relative . Change is measured in percentage points. and foreign employment to total employment.A.216 35. Countr y China China Singapore Mexico China Malaysia China Singapore Taiwan Province of China Mexico Taiwan Province of China Republic of Korea Source: UNCTAD database.13. dominance has remained largely unchanged since 1993. China Hong Kong. Ltd. 1996 by Ranking b y Transnationality Foreign assets Index Inde x a 1 2 3 4 5 28 25 26 4 5 UNCTAD database. able Departures from from Table II.12. Measured by foreign assets. This includes companies that could not be considered because of late arrival of a response to UNCTAD’s questionnaire.8 61. China Mexico/Panama Hong Kong.5 Corporation Orient Overseas Intern. Snapshot of the top 50 TNCs from developing developing countries.Hong Kong. For the first two economies -. Singapore Telecommunications Ltd. China Chemicals. Chinese Petroleum Grupo Celanese SA Formosa Plastic Group Ssangyong Cement Industrial Co. to a lesser degree.A.5 3. foreign sales to total sales. Newcomers to the top 50 TNCs from developing developing countries. Plate Glass & Shatterprufe Ind.1 ariable Variab le Foreign assets Foreign sales Foreign employees Median index of transnationality b Total 104 338 1. a snapshot (table II. As in the case of the world’s top 100 TNCs.1 Source : a b UNCTAD database..10. As defined in footnote a) of table II.a 1996 by Ranked b y f oreign asset s Corporation 5 10 17 19 23 28 39 42 43 44 48 50 Sappi Limited Compãnia de Telecomunicaciones de Chile Hyundai Engineering & Construction Co. China.A.World Investment Report 1998: Trends and Determinants able from developing transnationality. Within the context of this list South Africa is treated as a developing country. (Billions of dollars.0 71. percentage and number of employees) Change Chang e 1996 vs. able Newcomer wcomers from Table II. Standard Industrial Classification which is used by the United States Securities and Exchange Commission (SEC). 1995 31. Compania de Petroleos de Chile Malaysian Airline Berhad Bavaria S. & Exp. Imp.6 81.615.9. Table II. Grupo Televisa S. de C.

This trend partially reflects a catching-up effect. The latter increase.the dominance remains regardless of whether the absolute numbers of firms. Top 4 decreases in foreign assets among from developing the top 50 TNCs from developing countries. Foreign assets.12. The overall ratio of foreign assets to total assets increased from 17 per cent in 1995 to 22 per cent in 1996. foreign Figure II. 1995-1996 (Percentage) Source : UNCTAD database.II. 5 1 .Chapter II Country breakdown from developing Figure II. Even though the ratio of foreign to total assets is about half of the ratio of the top 100.13 shows the top five TNCs from developing countries with the largest increases in foreign assets. a b The foreign assets of only 4 TNCs declined in the period. Figure II.12. foreign sales or foreign employment are considered (figure II. a Estimated growth rate. as the top 50 developing countries' TNCs implement strategies to exploit their foreign Figure II. represents a relative slowdown compared with the overall increase between 1993 and 1995. although considerable. from $79 billion to $104 billion. foreign assets. figure II. see also annex table A.13. they increased by around 280 per cent. Estimated growth rate. the top 50 developing countries‘ TNCs have built up their foreign assets almost seven times faster during the period from 1993 to 1996 than the top 100 TNCs did (see also foreign employment below).12). Total foreign assets of the top 50 developing countries‘ TNCs amounted to $103 billion in 1996. Between 1993 and 1995.14.14 shows the top five TNCs with the largest decreases. Country breakdown of the top 50 TNCs from developing by number for countries by number of entries for 1993 and 1996 China and the Republic of Korea -. Top 5 increases in foreign assets among from developing the top 50 TNCs from developing countries. and by a further 31 per cent between 1995 and 1996. • Source : UNCTAD database.a 1995-1996 (Percentage) Source : UNCTAD database.

resulted in an increase in the ratio of foreign sales to total sales. The build-up of foreign employment is very much in line with the buildup of foreign assets and foreign sales. Source : UNCTAD database.World Investment Report 1998: Trends and Determinants growth potential and competitiveness through increased transnationalization and the acquisition of a portfolio of locational assets. Top 5 decreases in foreign sales from developing among the top 50 TNCs from developing countries. 1995-1996 (Percentage) Source : UNCTAD database. This rise of 14 per cent.000. Total foreign employment of the top 50 developing countries‘ TNCs rose by almost 17 per cent between 1995 and 1996. from 34 per cent in 1995 to 41 per cent in 1996. Estimated growth rate. Figure II. These trends of declining or stagnating overall employment and simultaneously increasing foreign employment are common to the top 50 TNCs and the top 100 TNCs. the ratio of foreignto-total-employment rose from 11 per cent in 1993 to 34 per cent in 1996. similar to the trend displayed by the top 100 TNCs.240.16. total employment increased by only three per cent. and figure II.000. (For detailed company information. Wing On Company International (Hong Kong.17. compared to $120 billion in 1995. China) enjoyed the highest rise in transnationality index between 1995 a • Source : UNCTAD database. 52 . while in 1993. During the period 1993-1996.15 for the top five increases and figure II. see figure II.1 • Foreign sales . Transnationality. • Foreign employment. foreign employment.15.17 shows the five foreign employment Figure II. and a simultaneously less dynamic increase of total sales. Top 5 increases in foreign employment TNCs with the largest increases in from developing among the top 50 TNCs from developing countries.16 for the top five decreases in foreign sales. 1995-1996 (Percentage) foreign Figure II. Total foreign sales of the top 50 developing countries‘ TNCs amounted to $137 billion in 1996. Top 5 increases in foreign sales from developing among the top 50 TNCs from developing countries.18 1995-1996 shows the five TNCs with the largest (Percentage) decreases in foreign employment. that figure was about 548. to about 1. foreign Figure II. Consequently.) This large increase is not surprising given the huge build-up of foreign assets between 1993 and 1995.

2 32. The difference between Figure II.3 13.4 2.7 35.6 33.1 17.9 7.19).6 2.4 7. machinery.1 37.2 13. 1996 verag Avera g e transnationality (Per cent) 59. and 1996 (figure II. by industry Table II. a Estimated growth rate. The telecommunication.2 5. petroleum and mining Chemicals and pharmaceuticals Automotive TOTAL Foreign assets (in billion dollars) 2. by industry. 1995-1996 (Per cent) Source : UNCTAD database. Top 5 rises in transnationality among the top 50 from developing TNCs from developing countries.8). Averages among the top 50 TNCs from developing countries in transnationality. the top 50 TNCs and top 100 TNCs in their transnationalization indices of the petroleum and mining industry is also remarkable: 19 versus 52.7 6.4 44. transportation.6 38.20.2 0. with transnationality indices of almost 60 per cent to 45 per cent (table II.3 Foreign assets as per cent foreign of top 100 f oreign assets 2. Estimated growth rate.3 5.8 100. 1995-1996 (Percentage) Source : UNCTAD database.1 47.8 32.1 18.8 103. Top 5 decreases in foreign employment among from developing the top 50 TNCs from developing countries. as well as chemicals and pharmaceuticals rank significantly higher than they do for the top 50 TNCs from developing countries.2 2. a Estimated growth rate.1 a Industry Industr y Telecommunications Transportation Construction Trading Miscellaneous Steel.6 5. Average. Top 5 falls in transnationality among the top 50 TNCs from developing countries. where food and beverages.4 54. a Source : UNCTAD database.6 0. and Gruma (Mexico) experienced the largest fall (figure II.2 6.0 30.8 7. construction and trading industries are the most transnational industries among the top 50 TNCs. 1995-1996 from developing (Percentage) Figure II.9 6.3 31. engineering Electronics and electrical equipment Tourism/hotel Food and beverages Diversified Oil.6 2. able Avera verag from developing transnationality.0 Source : a UNCTAD database.3 6. 14.Chapter II foreign employment Figure II.14).6 5 3 .7 5.3 19. This result contrasts with the findings for the top 100 TNCs (table II.

petroleum and electronics/ electrical equipment industries dominate the top 50 TNCs (table II. able Industry Table II. machinery & engineering Chemicals and pharmaceuticals Automotive Media 1993 50 9 8 2 7 5 1 1 6 4 4 1 1 1 1996 50 11 8 6 5 5 4 4 3 2 1 1 - As noted for the top 100 TNCs. Expansion as well as occasional retreat is rather evenly distributed over all industries. corporations in food and beverages.15. Apart from diversified TNCs. all other industries have less than five entries in the list. and mining Electronics/electrical equipment Other Trading Transportation Construction Tourism/hotel Steel. Department of Economic and Social Development.15). data available for the top 50 developing countries‘ TNCs do not lend themselves to the calculation of a network-spread index as was developed for the top 100 TNCs. Industry composition of top 50 TNCs from developing from developing countries in 1993 and 1996 (Number of entries) Industry Total Diversified Food and beverages Petroleum ref.2 Source : U N C TA D Notes 1 2 On the growth of TNCs from developing countries.World Investment Report 1998: Trends and Determinants • Industry composition . 1993. see United Nations. 54 ./distr. The high proportion (22 per cent) of diversified TNCs in the top 50 TNC list contrasts with the low proportion of diversified TNCs (five per cent) in the top 100 TNC list. There is no clear indication that one industry sector is leading the trend. Unfortunately. the process of transnationalization continues gradually for the top 50 TNCs.

Source : chapter III. Initially.1 and table III. In 1997 alone.Chapter III CHAPTER III INVESTMENT POLICY ISSUES Trends A. at least 143 countries and territories had enacted FDI-specific legislation (figure III. countries in all regions have come to adopt FDI-specific regulatory frameworks to support their investment-related objectives.1). many investment laws were intended to control the entry and operations of foreign investors.1.1. 17 countries introduced new foreign Cumulative number Figure III.1 and every year a number of existing regimes are amended. 55 . 1. and another 59 introduced regulatory changes with respect to one or more specific items affecting FDI. 1953-1998 substantially changed existing laws. Trends The trend towards a liberalization of national investment regimes has been accompanied by intensified international discussions and negotiations on FDI rules. which have generally complemented trends at the national level. however. By 1997. National policies Over the past four decades. since the early 1980s. table III. Cum ulative n umber of countries and territories with investment laws or special FDI regimes.

Economies are listed according to the chronological order of their adoption of FDI legislation. 1995)c Democratic Republic of the Congo (1986) Rwanda (1987) Senegal (1987) Somalia (1987) Botswana (1988) Gambia. The (1988) Gabon (1989) Mauritania (1989) Niger (1989) Togo (1989) Zimbabwe (1989) Benin (1990) Burundi (1990) Cameroon (1990. 1994)c Lesotho (1969) Liberia (1973) Comoros (1982. 1995) c Lao People’s Democratic Republic (1994) Malaysia (1994) Oman (1994) Afghanistan (1995) Bangladesh (1995) China (1995) Georgia (1995) Jordan (1995) Palestinian territory (1995) Kazakhstan (1997) Kyrgyzstan (1997) Micronesia. the year in which the prevailing legislation was adopted is indicated in parenthesis. Countries and territories with special FDI regimes. based on national reports and various sources. 1995) c Australia (1975) Canada (1985) New Zealand (1985) Israel (1990) Spain (1992) Finland (1993) Ireland (1994) Portugal (1995) France (1996) Africa Central African Republic (1963) Kenya (1964) Seychelles (1967. The country has more than one set of legislation dealing with FDI. Note : 56 . Islamic Republi of (1990) Sri Lanka (1990) Taiwan Province of China (1990) Tuvalu (1990) Iraq (1991) Niue (1991) Philippines (1991) Syrian Arab Republic (1991) Thailand (1991) Yemen (1991) Azerbaijan (1992) Democratic People’s Republic of Korea (1992) Nepal (1992) Papua New Guinea (1992) Mongolia (1993) Turkmenistan (1993) Armenia (1994) Cambodia (1994) Indonesia (1994. This table does not cover provisions contained in laws or regulations that do not deal specifically with FDI. 1994) c Sudan (1990) Mali (1991) Uganda (1991) Burkina Faso (1992) Congo (1992) Malawi (1992) Namibia (1992) Algeria (1993) Cape Verde (1993) Mauritius (1993) Mozambique (1993) Sierra Leone (1993) Tunisia (1993) Zambia (1993) Angola (1994) Djibouti (1994) Eritrea (1994) Ghana (1994) Côte d’Ivoire (1995) Guinea (1995) Nigeria (1995) Libyan Arab Jamahiriya (1996) Madagascar (1996) Egypt (1997) Ethiopia (1997) United Republic of Tanzania (1997) Pacific Asia and the Pacific Kuwait (1965) Republic of Korea (1966) Pakistan (1976) Cook Islands (1977) Tonga (1978) Maldives (1979) Saudi Arabia (1979) Bangladesh (1980) Bahrain (1984) Samoa (1984) Solomon Islands (1984) Qatar (1985) Viet Nam (1987) Myanmar (1988) Iran. Refers to a law or decree dealing specifically with FDI. a 1998 Latin America and the Caribbean Brazil (1962) Chile (1974) Argentina (1976) Barbados (1981) Panama (1983) El Salvador (1988) Bahamas (1990) Bolivia (1990) Trinidad and Tobago (1990) Colombia (1991) Nicaragua (1991) Peru (1991) Honduras (1992) Paraguay (1992) Venezuela (1992) Ecuador (1993) Mexico (1993) Cuba (1995) Dominican Republic (1995) Jamaica (1995) Uruguay (1998) Central and Europe Eastern Europe b Hungary (1988) Slovenia (1988) Albania (1991) Belarus (1991) Croatia (1991) Estonia (1991) Latvia (1991) Poland (1991) Romania (1991) Russian Federation (1991) Slovakia (1991) Bulgaria (1992) Czech Republic (1992) Republic of Moldova (1992) Ukraine (1992) The former Yugoslav Republic of Macedonia (1993) Lithuania (1995) Developed De veloped countries Greece (1953) Turkey (1954. Federated States of (1997) Uzbekistan (1998) Source: a b c UNCTAD. but are relevant to FDI.Tr World Investment Report 1998: Trends and Determinants able Tab le III.1. 1992)c Morocco (1983. Includes developing Europe.

type.3). Including changes aimed at increasing control as well as reducing incentives.in the direction of more favourable conditions for FDI more liberal entry conditions and procedures a more liberal operational conditions b and frameworks a more incentives more promotion (other than incentives) c more sectoral liberalization more guarantees and protection .2. Including liberalizing changes or changes aimed at strengthening market functioning. 4 Liberalization moves in 1997 involved in particular the removal of operational conditions and the opening up of new industries to FDI (table III. and 11 per cent in the opposite direction. The favourable changes included liberalizing measures as well as new incentives. able regulatory chang hanges. 94 per cent of the FDI regulatory changes were in the direction of creating a more favourable environment for FDI (table III.2). National regulator y c hang es. This was the case in both developing and developed countries. a significant number of countries revised their intellectual property frameworks.2). based on national sources. Includes changes applying across the board. 1997 Item Number of economies that introduced changes Number of changes . Tab le III. The legislative activity in 1997 was partly a response to international commitments. Tab le III. 2 Of a total of 151 regulatory changes made in 1997 by 76 countries. 1991-1997 Item Number of countries that introduced changes in their investment regimes Number of regulatory changes Of which: More favourable to FDI a Less favourable to FDI b 1991 35 82 80 2 1992 43 79 79 1993 57 102 101 1 1994 49 110 108 2 1995 64 112 106 6 1996 65 114 98 16 1997 76 151 135 16 Source : a b UNCTAD. particularly in Africa. continuing a trend that started in the 1980s. Streamlining approval procedures was also an important feature of legislative reform.Chapter III most countries have adopted frameworks designed to attract investors and create a favourable investment climate. For example.in the direction of less favourable conditions for FDI less incentives more control 1997 76 151 3 61 41 8 17 5 7 9 Source: a b c UNCTAD. sometimes through the revision of negative lists of industries previously closed to FDI.3. b y type . the unfavourable changes increased control or reduced incentives. as well as increased incentives. Includes performance requirements as well as other operational measures. Includes free-zone regulations. 89 per cent were in the direction of creating more favourable conditions for FDI. National regulator y c hang es and their distrib ution.3 During the period 19911997 as a whole. based on national sources. The majority of changes concerned the telecommunication and broadcasting industries. following their commitments under the WTO Agreement on Trade-related Aspects of able regulatory chang hanges distribution. 57 . a three per cent increase in the former over the preceding year (table III.

particularly tax holidays.5 Investment promotion is an area in which government activity is particularly noticeable.4. i. Measures notified under Ar tic le 5. 36 countries introduced new incentives or strengthened existing incentives (mostly fiscal). Indonesia withdrew the part of its notification that concerned measures in the automotive industry. J une 1998 Country Argentina Barbados Chile Colombia Costa Rica Cyprus Dominican Republic Ecuador Egypt India Indonesia Mexico Malaysia Nigeria Pakistan Peru Philippines Poland Romania South Africa Thailand Uganda Uruguay Venezuela Type of measure Local content and trade balancing Local content Local content and trade balancing Local content Local content and trade balancing Local content Local content Local content Trade balancing Trade balancing Local content Local content Local content “Dividend balancing” a Local content Local content and trade balancing Local content Local content Local content Local content Local content Local content and foreign exchange balancing Local content Local content Local content Local content Local content Local content Local content Local content Trade balancing Local content Sector Automotive industry Pork-processing industry Automotive industry Automotive industry Agriculture General Cheese and groundnuts General Pork General Automotive industry General Pharmaceutical products General Automotive industry. b c The term “dividend balancing” used in India’s TRIMS notification describes a measure applied by India in 22 consumer goods industries which provides that. while the adoption of the Fifth Protocol of GATS on Financial Services (see below) is expected to relax limitations on the presence of foreign suppliers of financial services. Pursuant to commitments under the WTO Agreement on Trade-related Investment Measures (TRIMs). Incentives are still on the rise. Measures other than incentives. such as setting up investment promotion agencies and facilities. The entry into force of the Fourth Protocol of the General Agreement on Trade in Services (GATS) on Basic Telecommunications Services also led to the further removal of impediments to FDI entry in the telecommunication industry. the Madrid Protocol and the European Union’s Directives on Trademarks.e. seven countries introduced measures to abolish incentives. At the same time. 58 . In October 1996.4).Tr World Investment Report 1998: Trends and Determinants Intellectual Property (TRIPS). during a period of seven years after the start of commercial production. have also been taken to promote FDI. have been made more transparent (table III. The trend towards establishing able Artic ticle June Tab le III. During 1997. Poland has informed the TRIMs Committee of the elimination of this measure as of January 1997.1 of the TRIMs Agreement. b utility boiler. the amount of dividend that can be repatriated should be covered by the expor t earnings of the firm. fresh milk and soybean cake Automotive industry Automotive industry General General General Milk and milk products Automotive industry Certain chemicals Cash registers c General Automotive industry Telecommunication equipment Tea and coffee Various designated products General Automotive industry Automotive industry Source : a based on information provided by WTO. certain types of performance requirements have also been notified to the WTO.

6.9 Brazil . scope and depth of these discussions and negotiations. accounted for over 70 per cent of all zones worldwide.513 by the end of 1997 (compared to 1.213. the countries of the region launched negotiations for a “Free Trade Agreement of the Americas” (FTAA) which is expected to be concluded by 2005. In 1997 alone. 27 per country group countr y gr oup a cent of the 153 treaties concluded that year were between developing countries (figure III. Developments at the international level At the bilateral level.5.107 China .Chapter III specialized schemes to attract foreign investors. Apart from BITs. b y region. the network of bilateral investment treaties (BITs) has expanded further. one thing they have in common is that representatives of civil society (box III.1) are increasingly paying attention to them (box III. close to 100 other countries host export processing zones or free zones. b Figures show the number of zones in a given country. bilateral treaties for the avoidance of double taxation have also become quite numerous. At the Second Summit of the Americas in Santiago de Chile on 19 April 1998. Its negotiating process is to be transparent and to take into account the differences in levels of development and size of the economies in the region in order to create opportunities for full participation by all countries. 249 were concluded by Figure III.14. Slovenia . Expor t pr ocessing zones and free zones. database on BITs.4 Dominican Republic .11 Turkey . 1996 Region North America Asia Europe Africa Caribbean Central America Latin America Middle East Pacific Total Number of zones 320 225 81 47 43 41 41 39 2 839 Selected countries a United States .27 Honduras .15.11. The agreement is to be balanced.360 by the end of 1996). adding to the substantial number of more than 800 such zones in existence in 102 countries (table III.2). Bulgaria . b Mexico . At the regional. b y between developing countries. 1997. with the total number of treaties having reached 1. and are discussed separately in the last section.1 608 Source : a WEPZA.26 Former Yugoslavia .2). 6 The negotiations on investment rules are to build on the efforts already initiated by 59 .2.8 Kenya . Of these. able Export processing by Tab le III. Colombia .7 Australia .9. The United States also has 380 sub-zones in manufacturing plants. such as export processing zones and free-trade and investment zones. comprehensive and WTO-consistent and would constitute a single undertaking. discussions or negotiations on the development of investment rules have proceeded in various forums. Sudan .8. BITs concluded in 1997. While there are considerable differences regarding the pace. 2. In addition.124. Indonesia .8. along with the United States. The number of countries that have signed BITs has increased from 165 in 1996 to 169 in 1997. The 18 countries shown. 153 BITs were concluded. Costa Rica . • Source : a UNCTAD.5). was strong in 1997: eight countries either formulated free zone regulations or established new free zones in that year. In 1997. Jordan . Egypt . plurilateral and multilateral levels.

While civil society can be seen as a counterbalance to the state. Some NGOs put more emphasis on lobbying via civil society from the very outset of their work on an issue. A case can also be made that national parliaments.and represent -. should be treated differently.and aspiration-driven organizations of civil society usually reject the notion that they belong to the same category of organizations as private enterprises driven by the profit motive. professional associations. 2. Non-profit. but with a role that takes them beyond their social origins when they seek to influence state employment policies. an absolute definition that excludes business from civil society is perhaps not very helpful. In this sense. the building of civil society can be seen as an objective whose achievement must be purposefully and actively sought. civil society has been defined. academic institutions. The first is to approach a relevant domestic ministry. and the Rio Earth Summit and the GATT/WTO -.Tr World Investment Report 1998: Trends and Determinants Box III. in order to achieve wider economic. The final approach is to civil society generally at national and international levels. Box III. political and social goals. the United Nations has employed the term “NGO”.e. both are inextricably linked. at different levels of organization. such as. Many NGOs pursue a step-by-step strategy. women’s equality and human rights. However. the parliament) may be approached. 1996b). Certain NGOs have had a long involvement in at least some international economic debates and negotiations on which they have had an impact. for example. NGOs and international rules on investment The late 1990s might come to be remembered as the time when non-governmental organizations (NGOs) first became a force in international economic policy-making and when the principles of participation. democracy and human rights are to be realized. reflecting the globalization of issues. to define a relatively limited universe of non-state actors.. the media. civil society as a whole is made up of NGOs.civil society and the private sector all over the world. communitybased and grass-roots organizations. The reverse is also the case. value. one useful way to regard both NGOs and the business community. Should this fail. the Guidelines on Consumer Protection (UNCTAD. cited in the United Nations Charter. However. and perceived. is a socio-political reality whose continuing expansion demands active support if the goals of development. representative bodies of the enterprise and financial communities. 1996b). a). the national legislative assembly (i. trade unions. all providing an interface between citizens and the state. professional guilds and a range of major social interest groups. e. However. at the heart of which is a shift in the relationship between the state and citizenry. One indicator of their influence is the role they played with regard to the negotiations of the Multilateral Agreement on Investment (MAI) in the Organisation for Economic Co-operation and Development (OECD). the negotiations on the draft United Nations Code of Conduct on Transnational Corporations (UNCTAD.. and thus also their members.g. Defining civil society The idea of “civil society” seeks to capture the way in which the world appears to be changing politically. Traditionally. should be treated as a separate category. that is now changing rapidly and the civil society with which international organizations work is itself in the process of becoming globalized. particularly international (but sometimes national) non-governmental organizations active in the fields of development. is as interest groups concerned with advancing their own agenda through the United Nations. only in the national context. Civil society is a “work in progress” which. the environmental ministry of a member of the European Union. Given the sheer diversity of the institutions that comprise -. disarmament.all in the /. as the legislative branch of government. However. some forums (including UNCTAD) have accepted that non-profit business associations and cooperatives could be treated as part of civil society. One area where there is a lack of definitional clarity is whether the private business sector should be included in the definition of civil society. 60 . Until recently. NGOs are likely to remain a force to be dealt with in the foreseeable future. in whatever form the latter organizes itself. It is also necessary to consider whether trade unions created within the private sector. while existing throughout much of the world in different shapes and forms.1. consultation and sustainable development gained increasing acceptance in shaping international debate. capacity and strength. Source: UNCTAD (forthcoming. distinct from civil society.

enforced a provision of the Mammals Protection Act (1972) relating to the high mortality rate of dolphins when tuna were caught with purse-seine nets. In brief. “some think it could fundamentally alter the way in which international economic agreements are negotiated”. NGOs are concerned that much environmental law and regulation might be undone if governments grow fearful of endless and costly lawsuits by foreign investors under the MAI. the assets of a private party lose value. some dolphins were caught and drowned in the purse-seine nets. NGOs have established themselves as a force to be reckoned with in discussions and negotiations over international rules on investment. In late 1996. since tuna swim below dolphins. the investor-state disputesettlement procedure could well decide in a given case that a regulatory taking constituted an expropriation. NGOs feared that. a “Network guerillas” . 61 . 1998a). were the Government of Canada to lose this suit. The importance of new technological tools and the increasing organization and sophistication of NGOs cannot be understimated. the availability of such a facility as the Internet has greatly enhanced the capacity of NGOs to share information. In the subsequent debates over the North American Free Trade Agreement (NAFTA) in 1995. whether at the OECD or in some other forums. coordinate their efforts and connect with a global audience. The GATT panel found that the United States decision was inconsistent with GATT rules.a petrol additive produced by Ethyl that is allegedly considered to have an adverse effect on the operation of vehicle pollution control components -. others felt that the whole system needed to be reviewed. 1996).was effectively 'expropriation' since it reduced the value of the company's assets. which devoted much attention to the need for governments to engage in a discussion with “interested groups in their societies” over the process of globalization and the implications of the MAI.dispute panel (Lindert and Pugel. The issue is relevant because. concluded) late 1980s and early 1990s. This decision upset environmentalists worldwide and suggested to many of them that the multilateral trade rules were indifferent if not inimical to environmental concerns. the focus of many NGOs already working on trade. In more recent years. there would be major legal repercussions in the area of the environment and public health and safety. raise complex questions of national policy in both developed and developing countries. Some environmental NGOs took the position that a change was needed in the GATT/WTO rules to make them more “environmentally friendly”. Perhaps the main contribution of recent NGO campaigns has been in moving the debate on international investment rules away from narrow technical issues and towards a wide-ranging discussion of regulation and globalization.2. 30 March 1998. investment and development issues shifted in part to the OECD. Concerns of NGOs in this domain have been exacerbated by a suit brought against the Government of Canada by the United States Ethyl Corporation under provisions of the NAFTA that are similar to the proposed MAI provisions. falls under the rubric of a “regulatory taking”: a situation where. Source: Graham. Mexico disputed this decision and brought the United States to a General Agreement on Tariffs and Trade (GATT) -. The case in Canada. These organizations are likely to continue to play a role in such negotiations. it appeared to some that a regulatory taking affecting a foreign investor might qualify as an expropriation and hence be subject to compensation. a The involvement of NGOs in international economic negotiations can be traced to at least 1988 when the United States. This shift was emphasized in the OECD Ministerial Statement (OECD. in the draft language of the MAI.Chapter III (Box III.now World Trade Organization -. by virtue of the implementation of a law or regulation by a government. according to a commentator. where the MAI was under negotiation. with up-to-the-minute material. at the request of the Earth Island Institute in California. which by their very nature touch on the entire range of matters relating to production and the production process. Indeed. 1998. some NGOs opposed NAFTA whereas others sought to modify it to take environmental and labour issues into account. This is the logical consequence of the internationalization of the domestic policy agenda. the ongoing debate is a clear reminder that FDI issues. If it were so. Financial Times . and the general situation flagged by the NGOs. including an audience in developing countries. Ethyl claimed that the decision by the Government of Canada to ban the import and transport of MMT -. If broad consensus is to be achieved. it is thus essential that international investment discussions and negotiations involve all those potentially affected.

In June 1998. 62 . the four members of MERCOSUR and Canada signed a “Trade and Investment Cooperation Arrangement” aimed at enhancing economic relations between the parties. Furthermore. the San Jose Declaration recognizes and welcomes the interests and concerns that different sectors of society have expressed in relation to the FTAA -. FTAA Box III.and encourages these and other sectors of civil societies to present their views on the topics under negotiation in a constructive manner. /. the Working Group was to prepare for the negotiations on a future investment chapter of the FTAA by promoting an exchange of ideas among countries on the regulatory alternatives available to them. the Group was then to identify the areas of convergence and divergence in the national and international frameworks. on 17 June 1998. • Also on the American continent. without creating obstacles to investments from outside the hemisphere. The Group was asked to begin by developing two inventories. cooperation on customs matters. • On the basis of such an assessment and description. the Group found that practically all countries of the American continent offered constitutional protection to the basic principles of private property.” 8 Furthermore.3. it was agreed that the Negotiating Group on Investment “should develop a framework incorporating comprehensive rights and obligations on investment. in particular in the areas of trade and investment. as well as a description of inward and outward investment flows in the region. The arrangement establishes a plan of action which foresees a framework for negotiating bilateral investment agreements. As for convergence. this plan of action provides for cooperation in the WTO and other appropriate forums on issues of common interest as well as consultations on the negotiation and implementation of the FTAA. one of the existing investment agreements within the region and the other of the national investment regimes in the continent. To that end. and the identification of measures distorting or hindering trade and investment.Tr World Investment Report 1998: Trends and Determinants the FTAA Working Group on Investment (box III. his investment and related flows. freedom of enterprise. The arrangement also establishes a council of business representatives from the member countries to advise the parties on areas of particular concern to the private sector.. environmental and academic groups -. during the first meeting of the FTAA Negotiations Committee. it establishes a committee of government representatives to receive inputs from civil society groups and present a range of views for the consideration of ministers.in particular business. labour. taking into account the areas already identified by the FTAA Working Group on Investment and develop a methodology to consider potential reservations and exceptions to the negotiations.3) and “aim to establish a fair and transparent normative framework to promote investment through the creation of a stable and predictable environment to protect the investor.. It had two objectives: • To present to the governments of the region a precise and clear assessment of the existing normative frameworks applicable to foreign investment in the American continent.”7 A Negotiating Group on Investment was established for this purpose. Preparing for negotiations on investment rules in the FTAA The Working Group on Investment met between September 1995 and March 1998. On the basis of these inventories.

compensation for losses due to armed conflicts. admission of managerial personnel. most-favoured-nation and sectoral reservations. scope of application. The first option was the negotiations. general exceptions and settlement of disputes.3 (concluded) equality between foreigners and nationals. and many include basically the same exceptions to most-favoured-nation treatment (i. the processes of authorization and registration of foreign investment. and to continue the interaction with the private sector through seminars. With respect to its second objective. other relevant issues may be agreed upon): basic definitions. 63 . the Group identified 12 substantive issues that will be subject to negotiation (without prejudice to the possibility that. mechanisms for the settlement of investment disputes. Negotiating Group on Investment. principles and obligations of general application. • On possible approaches to the negotiations two options were discussed. there is also a great similarity between the agreements with respect to settlement of disputes. including the existence of a national authority specifically responsible for these matters (different powers being held by sub-national authorities in different countries). general exceptions and specific reservations to the general obligations. negotiation of a chapter on investment that would establish obligations of general application. conferences and workshops. transfers of funds. in order to establish a transparent. national treatment. allowing for clearly defined reservations and exceptions on them. the scope of the application of national treatment and most-favourednation treatment. Free Trade Area of the Americas. in so far as some agreements grant national and most-favoured-nation treatment only to investments already established in accordance with national legislation. President. The second option was to engage in three activities: to expand and deepen the statistical study on investment flows in the Hemisphere with a view to arriving at the harmonization of national statistical systems. • Regarding the substance of the negotiations the Group recommended that the negotiation should negotiations. Finally.e. There is convergence regarding the justification of an expropriation decree and the criteria used to determine the amount of compensation. as well as in the criteria for determining the nationality of juridical persons. most-favourednation treatment and fair and equitable treatment. the means of payment and the due process guarantees to be followed. The main areas of divergence were found to lie in the definition and scope of the concept of foreign investment. without prejudice to exceptions in cases of serious balance-of-payments problems. In addition. More specifically. during the negotiations. the chapter on investment would be divided into three areas: definitions. to continue discussions on specific issues on which there is already convergence at the national level. and the industries that are open to foreign investment. the Group identified various perspectives and options for dealing with key substantive elements of an investment agreement. and due process of law. the principles of non-discrimination. it recommended the following: • With respect to the objectives of the negotiations the Group recommended that these should aim negotiations. All investment agreements between countries in the region are based on the principles of national treatment and most-favoured-nation treatment. national treatment and sectoral reservations. tax treaties and bilateral concessionary finance schemes). performance requirements. Source : Anabel Gonzalez. include. fair and equitable treatment. at a minimum. economic integration schemes. and stimulate investment opportunities while avoiding unjustifiable obstacles to extra-hemispheric investment. To achieve this. and many of the countries of the FTAA are members of ICSID or are in the process of adhering to it. expropriation and compensation. their investments and related flows. not only with respect to disputes between the parties but also with respect to disputes between investors and host countries.Chapter III Box III. at establishing a fair and transparent legal framework conducive to a stable and predictable investment climate to protect investors. to focus the negotiations only on the question of scope and coverage. comprehensive and balanced normative framework. while others grant such treatment at the pre-establishment phase. Most national regimes and investment agreements are committed to allowing transfers of capital related to an investment in a freely convertible currency and at the exchange rate prevailing on the day of the transaction.

the latter including the right of countries and communities to manage their own development. The thrust of the work being carried out. and needed to address environmental and labour issues. that it needed to be consistent with the sovereign responsibility of governments to pursue domestic policies. among others. Ministers recognized in particular that. the ASEAN Investment Area proceeds mainly through an approximation of objectives. and liberalization programmes. Thus. joint training programmes for investment officials. The investment initiative being discussed in ASEAN. for example.Tr World Investment Report 1998: Trends and Determinants • At the ASEAN Bangkok Summit Meeting in 1995. 1998a).org/ daf/cmis/mai/maindex. they argued. It would be based on three pillars: cooperation and facilitation. for now. and other measures to promote greater intra-ASEAN investment by facilitating the effective exploration of the region’s comparative and complementary locational advantages. not only among NGOs but also in a number of parliaments. creation of an Investment Unit within the ASEAN Secretariat. differs from the rule-oriented approach adopted in other regional integration frameworks by being designed to encourage investment through voluntary cooperation amongst members. promotion and awareness.9 after the text of the draft agreement was made public through the Internet (www. while the agreement needed to ensure a high standard of liberalization. in the light of the special treatment given to foreign • 64 . They also stressed their commitment to a transparent negotiating process and to active public discussions on the issues at stake. A number of non-OECD member countries were welcomed to participate as observers (box III. This was all the more important. which is expected to be signed later in 1998. forthcoming). They have stressed the need to ensure that key MAI provisions on.4). The overarching concern of NGOs is that the rights bestowed upon foreign investors by the MAI be balanced by a requirement to meet environmental and social responsibilities. including the European Parliament. as described in the ASEAN Plan of Action on Cooperation and Promotion of Foreign Direct Investment and Intra-ASEAN Investment. it also needed to take into account economic concerns and political. while avoiding legally binding commitments and dispute settlement mechanisms. These various activities are to be consolidated in a framework agreement on the ASEAN Investment Area.OECD. members decided to enhance ASEAN’s FDI attractiveness. One of the high points in the recent MAI negotiations was the meeting of the MAI Negotiating Group with non-governmental organizations (NGOs) in October 1997. consultations and exchange of information and experiences among ASEAN investment agencies on a regular basis. social and cultural sensitivities. involves cooperation on programmes for the promotion of FDI and intra-ASEAN investment. Work has continued in the OECD with regard to the negotiations on a Multilateral Agreement on Investment (MAI). while emphasizing policy flexibility and informal consultations to resolve difficulties (Bora. in order to deal with outstanding difficulties (OECD. Since then.htm). strategies and practices. the ministers decided to allow for a period of assessment and consultations. At the April 1998 ministerial meeting. the MAI has attracted wide attention. initiated in 1995. simplification of investment procedures and enhancement of transparency in investment policies. general treatment and expropriation cannot be construed to undermine the regulatory powers of government.

the negotiations on a Multilateral Agreement on Investment (MAI) in the OECD reached a critical stage. a In addition. The OECD Multilateral Agreement on Investment: state of play as of July 1998 In April 1998. It seeks to provide predictability and security for international investors and their investments. Negotiators are aiming for a set of disciplines and exceptions that would achieve a high standard of liberalization and a satisfactory balance of commitments. • The MAI is meant to be a free-standing international treaty open to all OECD members and the European Community and to accession by non-members willing and able to meet its obligations. the protection of investment. Basic principles • The MAI addresses investors and investments.. negotiators had been under increasing pressure from nongovernmental organizations and others to increase transparency and seek broad-based political support. operation and sale. Furthermore. and thus promote economic growth and efficiency. and MAI disciplines would not apply where specific exceptions had been agreed to. sustainable development and employment. 1996). profits and dividends) must be freely permitted to go to and from the host country. Between September 1995 and early 1997. Investment will be defined broadly to include enterprises. Main features Core MAI rules : • Transparency : publication of laws and regulations affecting investments. There is broad support for including a strong commitment by governments not to lower environmental or labour standards in order to attract or retain investment. • There is increased convergence of views on the need for the MAI to address environmental and labour issues. expansion. the parties would give full consideration to the particular circumstances of each country. social and cultural sensitivities. main features and main outstanding issues as they have emerged from the negotiation process and the draft agreement so far: The MAI is intended to provide a broad multilateral framework for international investment with high standards for the liberalization of investment regimes. In reviewing proposals for adherence to the MAI. Investors would not be able to challenge domestic regulations as de facto expropriation. with business and labour. and effective dispute-settlement procedures. including their establishment. The MAI would not inhibit the normal non-discriminatory exercise of regulatory powers by governments. taking full account of economic concerns and political. a pause for reflection was agreed to by the ministers. the MAI seeks to be consistent with the sovereign responsibility of governments to pursue their policy objectives. including country-specific exceptions to accommodate the applicant’s development interests. basic principles. other financial instruments and intangible assets. portfolio investments. /. • Most-favoured-nation treatment: investors and investments from one MAI party to be treated no less favourably than those from another MAI party.4. • National treatment: foreign investors and investments to be treated no less favourably than domestic investors and investments. and with non-governmental organizations. and rising living standards for both developed and developing countries (Witherell. • Transfer of funds: investment-related payments (including capital.Chapter III Box III. 1995. The negotiations had begun formally in 1995. 65 . the negotiating process was mostly of a technical nature. Engering. Partly as a result of these pressures. to last until October 1998. there is an ongoing dialogue with non-member countries.. Between early 1997 and the OECD ministerial meeting of April 1998. real estate. • Country-specific exceptions would be an integral part of the agreement. Eight non-members currently participate as observers. The following paragraphs describe the objectives.

Hong Kong. Estonia. whether the MAI should explicitly support internationally recognized core labour standards. the MAI would not: • mandate detailed domestic measures affecting investment. • Temporary safeguards: provisions to enable countries to take measures necessary to respond to a balance-of-payments crisis. cultural exceptions. adequate and effective compensation. such as minimum export targets for goods and services.4. an interpretative note regarding the articles dealing with general treatment and expropriation aimed at making clear that the MAI would not inhibit the exercise of normal regulatory powers of government (particularly in the area of environment).a code of good business conduct setting out OECD members’ expectations behaviour and activities of TNCs -. • Labour standards: whether there should be a provision prohibiting lowering labour standards to attract or retain an investment. flexible regime of standstill on new non-confirming measures. nor require member countries to adopt a uniform set of investment regulations. 66 . and does not prevent the parties from setting national environmental standards for investment. Source : OECD materials. concluded) • Performance requirements: targeted prohibitions on certain requirements imposed on investors. Exceptions to MAI rules: • General exceptions : any country would be able to take measures necessary to protect its national security or to ensure the integrity and stability of its financial system. and a cross-reference to the OECD Guidelines on Multinational Enterprises. and the Slovak Republic. • prevent parties from providing funds for domestic policy purposes. environment and labour measures. Latvia. • Expropriation: may only be undertaken for a public purpose. a qualification on national treatment. they will permit each country to maintain non-conforming laws and regulations. Brazil. current lists of reservations to the MAI. Furthermore. A tentative agreement reached on this issue in May 1998 between the United States and the European Union appears to contain elements for possible inclusion in the MAI.would be annexed to the MAI without changing their status as non-binding recommendations. with recourse. China. if necessary. local content rules or technology transfer requirements. is consistent with multilateral environmental agreements. to binding arbitration of disputes between states and between foreign investors and host states. • Conflicting jurisdictions: this issue arose because of the adoption in one country of two laws that would directly affect investors from third countries. The OECD Guidelines on Multinational Enterprises -. • Environmental protection: the objective is to ensure that the MAI does not stimulate “pollution havens”. • Country-specific exceptions: negotiated among MAI parties. both foreign and domestic. • Dispute settlement: provision for resolving disputes through consultations. Lithuania.Tr World Investment Report 1998: Trends and Determinants (Box III. In March 1998. the Chairperson of the Negotiating Group put forward a package proposal which included the following elements: language for the preamble. Main outstanding issues • Liberalization and exceptions: proposed exceptions to most-favoured-nation treatment for regional integration schemes (REIO clause). with prompt. and • require parties to accept each others’ product or service quality or safety standards. safety. a Argentina. Chile. a binding provision on non-lowering of standards on health.

concerned that the draft multilateral agreement on investment (MAI) reflects an imbalance between the rights and obligations of investors. but should also contribute to responsible development of the country of establishment by promoting technology. 1998). a . relations with the ACP countries and the EU’s development policy. Many of these and other concerns were also shared by the European Parliament in a “Resolution containing Parliament’s recommendations to the Commission on negotiations in the framework of the OECD on a multilateral agreement on investment (MAI)” (box III. Emphasizes the need for a broader public debate and ongoing parliamentary monitoring of the negotiations being conducted within the framework of the OECD. and its relationship with international environmental agreements (MEA). commerce and the labor market or intellectual property and whereas the compatibility of the MAI with existing environmental. international conventions on intellectual property and regional agreements (REIO) have still not been clarified. healthy social relations and protection of the environment. some NGOs (e. bearing in mind that the decisions to conclude an agreement are a matter for the state and national parliaments. G. In fact. 5). environmentally and socially sustainable and regionally balanced economic development.. puts to the Commission the following recommendations: E. whereas the MAI must not only provide benefits to the industry and the countries of origin.10 Parliament’s Box III... whereas the aim of an MAI should be to prevent ruinous competition between investors which would be harmful to the populations concerned in order to foster. Resolution containing Parliament’s recommendations to the Commission on negotiations in the framework of the OECD on a multilateral agreement on investment (MAI) (Excerpts) The European Parliament having regard to its resolution of 14 December 1995 on the Commission communication entitled ‘A level playing field for direct investment worldwide’..Chapter III investors through the investor-state dispute-settlement provisions which would allow these issues to be decided by international expert tribunals. D. as it stands. F. regretting the fact that the negotiations have hitherto been conducted in the utmost secrecy. I. 1998. the MAI is unbalanced with respect to the rights and obligations of foreign investors and that adding nonbinding guidelines for the behaviour of foreign enterprises to the MAI’s legally binding provisions on investment protection would not be sufficient to rectify the balance. sustainable economic growth. H. /. employment. with even national parliaments being excluded. The NGOs also called for the MAI to include provisions on labour rights and consumer and environmental standards in order to ensure that the removal of barriers to FDI did not lead to a lowering of standards in these areas. guaranteeing the latter full rights and protection while the signatory states are taking on burdensome obligations which might leave their populations unprotected. NGOs believe that. 67 . Consumer Unity and Trust Society (CUTS) and the Council of Canadians (CoC) have prepared alternative texts to those in the MAI draft (CoC. Finally. CUTS. although transparency and parliamentary supervision in key international economic issues are of crucial importance for the legitimacy of relevant international agreements. social and cultural legislation and legislation on intellectual property rights in the EU. Some special interest groups such as authors and film-makers called attention to the threat that the MAI could pose for preserving cultural identity. 1. 5. on a global scale. whereas the EU has not yet supplied any studies on the impact of the MAI on trade..g. the European Parliament and the Council.

Notes that non-OECD member states. 3. Insists further that reference should be made to compliance with international human rights conventions and environmental and social standards not only in the preamble of the MAI and that the MAI should contain unequivocal provisions which prevent a lowering of existing environmental and social standards by the MAI and make possible the introduction of new standards. and OECD policy on development cooperation as formulated in ‘Shaping the 21st century: the contribution of development cooperation’ (1997). agreements on the responsibilities of multinational enterprises.Tr World Investment Report 1998: Trends and Determinants (Box III. national and EU legislation designed to promote sustainable development. 68 . and fears that EU Member States may come under pressure in these areas in the next few years. such as the Rio Declaration. but regards the fact that those countries may not themselves exert any influence on the content of the agreement as a major shortcoming of the MAI.. which is now accepted both by the OECD and by the G8 as the basic characteristic of relations between developed and developing countries. Calls on the Commission. Stresses that it is essential that the principle of partnership. the WTO’s consideration of this question must take full account of the results of the UN conferences. such as the undertaking to integrate economic. within a reasonable period. .. (b) previously agreed OECD guidelines.5.. investigating to what extent the draft MAI is in conflict with: (a) relevant international agreements. Agenda 21. and calls on the states involved in concluding the MAI to refrain from exerting any pressure on the developing countries in order to induce them to accede to it. in formulating prohibitions of specific performance requirements. 6. the UNCTAD Set of Multilaterally Agreed Principles for the Control of Restrictive Business Practices(1981) and the HABITAT Global Plan of Action and international commitments already entered into by the OECD. Considers it necessary for a derogation to be made for balance-of-payments disequilibria coupled with a provision to deter parties from abusively invoking balance-of-payments problems. so that the interests of the developing countries and their national policies are taken into account as well as the interests of investors. structural and cultural policies of the EU and its Member States. may also accede to the agreement under negotiation. to carry out an independent and thorough impact assessment in the social. culture and intellectual property. 13. 5. to ensure that the latter do not conflict with the environmental social. 11.. social and environmental policy (May 1997).. Calls for the question of investment protection to be examined in a multilateral context in which all the developing countries are involved.. should be respected. Calls on the Commission. would be the appropriate forum for these negotiations. therefore. particularly in the field of social and environmental legislation. environmental and development fields. (c) regional. and hence developing countries in particular. so that UNCTAD. particularly with regard to the environmental and social dimensions. the UN Guidelines on Consumer Protection (1985). continued) 2. /. 12. Is concerned that the performance requirements might curtail the right of States to implement existing industrial policies and to develop any new ones as required in future. .. as well as the WTO. as laid down in the OECD Code of Conduct of 1992. 14.

. 21 Calls for the invoking of national security interests to be made subject to objective criteria which are verifiable under the disputes settlement procedure.. 22 January 1996.. pursuant to the procedure provided for in Article 228(6) of the EC Treaty. thus avoiding the distortions that bribes can introduce in the international flow of investment.. adopted within the framework of such an organization and replacing the measures previously applied by these States.g. Calls on the Commission..any act of (Box III. health and safety. 1997a). to be too far-reaching. the definitive draft of the MAI to the Court of Justice for full examination.Chapter III • In 1997. 18. Welcomes the inclusion of the OECD guidelines for multinational undertakings as a an annex to the MAI. 69 . human rights and social matters. 23. takes the view that countries belonging to REIOs are not obliged to extend to countries not belonging to the organization concerned the more favourable treatment reserved for member countries.. compensation and the transfer of capital and profits. therefore. 1996). EU legislation and preventing further harmonization of EU legislation.. takes the view that governments must make sure that they cannot be condemned to making compensatory payments if they establish standards on the environment.. Source : European Parliament. labor. the OECD adopted the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (OECD. Instructs its President to forward this resolution to the Council. on the insertion of a separate part of a Regional Economic Integration Organization (REIO) clause permitting new harmonized measures... p.. but advocates that those guidelines should constitute a compulsory component of the MAI and calls in any case in this connection on the governments of the Member States to encourage international enterprises to draw up their own codes of conduct comprising provisions in the field of environmental protection. The Convention in particular prohibits -.. environmental legislation.5... in this connection also advocates the inclusion of an anti-abuse clause. the governments and parliaments of the Member States and the Secretariat of the OECD. VI. the Council and the Member States to submit. 175. . .. a Calls on the parliaments and governments of the Member States not to accept the MAI as it Official Journal of the European Commission. e. Considers the proposed provisions on investment protection. and in particular on expropriation.... stands: ... 37. including foreign investment. . . 1998.. .subject to the constitutions and fundamental principles of the legal systems of the states parties -. insists. 11 Another plurilateral instrument addressing this problem is the Inter-American Convention against Corruption which was opened for signature in March 1996 (OAS. IV. concluded) 15. The Convention seeks to establish high standards for national and international measures to combat bribery by public officials in international business transactions. the Commission.

The WTO negotiations of schedules on financial services were concluded on 12 December 1997. listing each nonconforming measure in an annex to the treaty. the Energy Charter Treaty (UNCTAD. suggests a number of preventive measures (including measures aimed at promoting accountability. The Supplementary Treaty. see UNCTAD 1997a. The text also provides an option for listed countries to reserve all or some of the state’s shares or assets that are being privatized to its own nationals. the Fourth Protocol to the General Agreement on Trade in Services (GATS) on Basic Telecommunications Services was concluded in 1997 in the framework of the WTO.ENCHARTER. by the end of June 1998. representative offices. 38 countries had ratified it (www. agencies. The results were attached to the Fifth Protocol to the GATS on Financial Services (WTO. it grandfathers existing restrictions. subsidiaries. as in other service industries. the Energy Charter Treaty contains an obligation to accord non-discriminatory post-investment treatment without exceptions. however. At the multilateral level. a large part of commitments on financial services concern commercial presence. these exceptions are set out by each country. It entered into force on 5 February 1998. box V. its investment provisions contained only a best-endeavour commitment with respect to nondiscrimination and provided that the Supplementary Treaty would deal with the conditions for a legally binding non-discrimination obligation for the preinvestment phase. as negotiated. Some commitments involve “grandfathering” of existing branches and subsidiaries of foreign financial institutions that are wholly owned or majority-owned by foreigners.18 for a summary description). provides for two types of exceptions from the non-discrimination principle. non-discrimination means the better of two standards: MFN treatment and national treatment.) and limitations on the expansion of existing operations. and aims at fostering the progressive development and hamonization of domestic laws in this area. including market access through commercial presence. to the elimination or relaxation of limitations on foreign ownership and control of local financial institutions (particularly through increase of foreign equity to more than 50 per cent). seeks to strengthen intergovernmental cooperation. which typically involves all forms of FDI entry.ORG).ENCHARTER. 1996b. Moreover. Commitments were made in all of the three major financial service sectors -- • • 70 . the negotiations on a Supplementary Treaty regarding investment and an amendment to the Energy Charter Treaty’s trade provisions were concluded in December 1997 (www. among other things. First. vol.Tr World Investment Report 1998: Trends and Determinants bribery involving international economic transactions. etc. These negotiations led to new and expanded commitments on the liberalization of market access for financial services. Among other things. In this context. For the pre-investment phase. limitations on the juridical form of commercial presence (branches. transparency and the involvement of civil society). The new commitments relate. In fact. it contains commitments to open market access for FDI entry in telecommunication service industries (WTO 1997a. • In Europe.ORG). 1997b) which is expected to enter into force by March 1999. As regards investment. I) entered into force on 16 April 1998 and.

In the light of these. But the outcomes of some of the discussions permit at least a few preliminary observations: 71 .is paying special attention to issues related to the development friendliness of international investment agreements (box III. These cover four broad areas: implications of the relationship between trade and investment for development and economic growth. Commitments in insurance were increased in number and depth. Indeed. possible conflicts and gaps in existing international instruments (box III.Chapter III banking. More specifically. with potential effects on all other economic activities. and the strategic role of services industries in influencing the allocation of financial resources and ultimately in attaining development objectives. the work programme concentrates on deepening the understanding of the issues involved in international investment instruments. helping to identify the interests of developing countries. • Work has also proceeded in the WTO Working Group on the Relationship between Trade and Investment on the basis of a list of issues that were identified for examination and discussion. including overlaps. More countries made commitments in banking than in securities.as well as in other services such as asset management and the provision and transfer of financial information. plurilateral or multilateral level (box III.with the active participation of principal groups in civil society -. and ensuring that the development dimension is understood and adequately addressed. given the close interrelations between financial services and macroeconomic policy. is pursuing a number of activities relating to international investment agreements. In this context. in accordance with its mandate. regional. UNCTAD. exploring the range of issues that need to be considered. and some countries have also chosen to schedule measures that may be characterized as prudential measures but could be challenged as limitations on market access or national treatment in the future. With five countries making commitments in financial services for the first time.8). both as providers and as regulators of financial services. Their main purpose is to help developing countries participate as effectively as possible in international discussions and negotiations on FDI in which they choose to participate. financial services have unique characteristics: financial stability and investor protection are crucial policy objectives in all countries. Finally. the total number of WTO members with commitments in financial services will increase to 102 upon the entry into force of the Fifth Protocol. These commitments may be particularly important for some developing countries which have only recently started to adopt market reforms in financial services. UNCTAD -.7). the economic relationship between trade and investment. * * * An attempt to assess the above processes at this stage would of course be premature. such services were provided with a prudential carve-out in the GATS Annex on Financial Services.6). be it at the bilateral. and with a view to consensus-building. stocktaking and analysis of existing international instruments and activities regarding trade and investment. and the identification of common features and differences between the two areas. governments have traditionally assumed a major role. securities and insurance -.

plurilateral and multilateral investment agreements other than those covered by the WTO. It covers inter alia the determinants of FDI. a detailed work programme was adopted at the first meeting of the Working Group in June 1997. as the proportion of FDI flowing to developing countries has increased rapidly. bilateral.6. The WTO Working Group on the Relationship between Trade and Investment The General Agreement on Tariffs and Trade (GATT) was concerned with measures affecting cross-border trade in goods. employment creation and competition. Item II deals with the economic relationship between trade and investment. Item III concerns existing international arrangements and initiatives on trade and investment. the advantages of entering into different types of investment agreements. 1997c).Tr World Investment Report 1998: Trends and Determinants Working Trade Box III.. Among the specific areas suggested for study are the examination of issues such as the effects of investment on transfer of technology. The list covers both economic and normative issues and reflects the varying interests of the members of the WTO as well as the complex nature of FDI: Item I concerns the implications of the relationship between trade and investment for development and economic growth. not only have FDI flows continued to increase but the pattern of these flows has changed considerably. the Group shall cooperate with UNCTAD and other appropriate international fora to make the best use of available resources and to ensure that the development dimension is taken fully into account. and the effects of investment policies on trade flows. The World Trade Organization (WTO). balance-ofpayments equilibrium. The creation of the Working Group reflects a compromise between various views. in the form of a “Checklist of issues suggested for study” (“the list”) (WTO. if any. The Singapore Ministerial Declaration requires the Group to examine the relationship between trade and investment. It includes a stocktaking and analysis of existing WTO provisions on investment-related matters. 72 . and the rights and obligations of home and host countries and of investors. and the Working Group on the Relationship between Trade and Investment and the Working Group on the Interrelations between Trade and Competition should draw on each other ’s work. while stating inter alia that: • • the work in this Group shall not prejudge whether or not negotiations will be initiated in the future. the effects of trade policies and trade agreements on investment flows. the treatment of foreign investment in the WTO Agreements is rather fragmented and limited in comparison with other existing international investment arrangements. and the implications for trade and investment flows of existing international instruments.. • • • Given the breadth of the mandate. future negotiations. However. These developments have been supported by the liberalization of national investment laws and the proliferation of bilateral and regional investment agreements which in turn have facilitated complementary links between trade and investment. held in Singapore in December 1996. These and similar factors led to the establishment of the WTO Working Group on the Relationship between Trade and Investment at the first WTO Ministerial Conference. is concerned with the treatment of foreign enterprises and natural persons as well. regional. its successor organization. Item IV deals with issues that are relevant to assessing the need for possible future initiatives and includes the identification of common elements and differences in existing international instruments in the area of investment. In recent years. regarding multilateral disciplines will take place only after an explicit consensus decision is taken among WTO members regarding such negotiations. the WTO General Council will determine after two years how the work should proceed. /.

6 (concluded) At meetings of the Working Group held in October and December 1997. and its expert meetings on MFI-related issues. • • • • • 73 . The main purpose of this series of over 20 papers is to address key concepts and issues relevant to international investment instruments. and to present them in a manner that is useful to policymakers and negotiators. UNCTAD’ AD’s Box III. as well as the WTO Working Group on the Relationship between Trade and Investment (where UNCTAD has observer status). the second for Asia took place in July 1998. in June 1997. right of establishment. The first event of this kind. between Geneva-based ambassadors and European business leaders.7. the Commission on Investment. Regional symposia. Undertaken jointly with the WTO. Particular attention is given to the way in which the key topics have been addressed in international investment agreements so far and what their development implications are. It also began discussions on the fourth item. was a high-level discussion. in March and June 1998. in New Delhi.Chapter III Box III. including the Trade and Development Board. co-sponsored with NGOs. A seminar was also organized jointly with the Consumer Unity and Trust Society (CUTS) and the Rajiv Gandhi Institute in New Delhi in July 1998. Geneva-based seminars. UNCTAD has developed a work programme which comprises: • Substantive support to the intergovernmental process. society. The Group will probably submit a report to the General Council at the end of 1998. Dialogues with civil society. two expert meetings of the Commission had been held. on the basis of which the General Council will decide how the work should proceed. dealing with existing agreements on investment and their development dimensions: the first meeting (28-30 May 1997) focused on bilateral investment treaties and the second (1-3 April 1998) on regional and multilateral investment agreements. Further meetings of the Working Group are scheduled to take place in October and November 1998. 1996c). particularly from a development perspective. The secretariat has invited interested groups from civil society to participate actively in a dialogue with relevant policymakers involved in international investment agreements. a similar event. identified a number of specific subjects that require further study. Preparation of a series of issue papers addressing key topics related to international investment agreements (on such issues as e. Issue papers. these are meant to facilitate informal discussions among delegates in Geneva on economic and regulatory investment issues. co-sponsored by UNCTAD and the European Roundtable of Industrialists. 1998e. Morocco. Symposia for policymakers in capitals aim at facilitating a better understanding of key issues related to international investment agreements. By mid-1998. the Group discussed the first three items on this checklist and. transfer of technology and restrictive business practices). and a third event is planned for the Autumn of 1998 with trade union representatives. UNCTAD’s work on a possible multilateral framework on investment To give effect to the mandate received from UNCTAD IX which called upon UNCTAD to identify and analyse implications for development of issues relevant to a possible multilateral framework on investment (MFI) (UNCTAD.g. Source : UNCTAD. which took place in December 1997. the second in June 1998. The first regional symposium for Africa took place in Fèz. further symposia are scheduled to take place during 1998 in Latin America and the Caribbean. The first such seminar took place in February 1998. Technology and other Financial Flows. Training activities on FDI for capacity-building purposes. based on WTO materials. Source : UNCTAD. took place with a group of NGOs in June 1998. Further training activities on FDI will consist of training courses for junior diplomats and a master class for negotiators. national treatment.

in particular on their role with respect to FDI and the recent trends in their number and distribution. Since countries throughout the world are actively competing for the productive growth opportunities that accompany foreign investment. In the case of a TNC. at least in principle. Consequently.especially those that are an integral part of a firm’s globally integrated production and distribution system -. A more procedural lesson that emerges is that. • • • B. Put differently. to agreements between countries at different levels of development. for instance. it is important that international discussions and negotiations associate. As discussions and negotiations on FDI advance at various levels. Double taxation treaties The evolution of investment regulations -. more generally. to incorporate a balance of interests and to allow for mutual advantage. since they touch. This section focuses on double taxation treaties. This applies particularly to developing countries and. The role and characteristics of double taxation treaties Reduced obstacles to FDI and the possibilities that they open up for firms to disperse production activities within integrated international production systems create new challenges for tax authorities. including representatives of civil society who have a real stake in the outcome of these processes. In particular. 1993a.Tr World Investment Report 1998: Trends and Determinants • Whatever the fate of these various initiatives. are difficult to negotiate. one of the main challenges ahead is how to ensure that the development objective is given effect and translated into the structure. in one way or another. pp.8). 1994. by their very nature.has become increasingly important and complicated (UNCTAD. if broad consensus is to be achieved. all those potentially affected. concluding BITs and pursuing regional agreements and multilateral discussions on FDI issues -. the question of possible double taxation of income from foreign affiliates -. 3). they need to take into account the interest of all parties. many countries see that it is necessary for them to examine the implications and appropriateness of international investment agreements. contents and implementation of international investment agreements (box III.has also been accompanied by increasing resort to bilateral treaties for the avoidance of double taxation.which includes adopting less restrictive national laws. any agreement involving developing countries must incorporate the special dimension of development policies and objectives. on the entire range of questions relating to production and the production process and therefore involve complex issues of national policy in both developed and developing countries. 201-210). For international investment agreements to be effective and stable. both home and host countries 74 . differences in national taxation norms may entail conflicting interests among all involved (Plasschaert. p. 1. it is also becoming increasingly apparent that agreements on investment.

e. as should their implementation (i. be helpful in this respect. securing a stable. increasing the quantity and quality of FDI flows. Indeed. to a large extent. This situation results from taxation taking into account both the source of income and the residence of the taxpayer. Indeed. if disputes arise. international double taxation is a phenomenon consisting of the concurrent exercise by two or more countries of their taxation rights. To a large extent. At the same time. to the development objectives of host countries. when it comes to “content”. this kind of analysis may be indispensable because. as well as the development objectives. it is important to ensure that the developmental needs and concerns of host developing countries are centrally addressed by any investment agreement so that it is development-friendly as well as investment-friendly in its orientation. The ones that are outlined below are intended to be illustrative: • One approach is to establish a catalogue of development-friendly elements of international investment agreements. it is possible that one element would counteract another. Box III. of an investmentfriendly environment and a development-friendly environment.e. indeed. which gives rise to overlapping assertions of jurisdiction and hence to double taxation. and recognizing the non-discriminatory exercise of governmental regulatory power in pursuing development objectives. of course. If international agreements can.9). to spell out in operational detail what “structure” means beyond the statement of objectives and to transcribe it into workable formulations that can be implemented. 75 . when negotiating agreements. More generally. the catalogue of development -friendly elements. plurilateral or multilateral levels. • • UNCTAD’s efforts at identifying the development dimensions of international investment agreements draw on ideas. enforced. Such a catalogue could be a checklist of elements -. A third approach begins with the recognition that not only the contents (i. Such a catalogue would be compiled to make sure that.can be addressed in a mutually beneficial manner. monitored and.host countries. The challenge is. adjudicated. suggestions and feedback from governments as well as other interested parties. specific treaty provisions) of investment agreements need to be development-friendly. Source : UNCTAD. Such objectives could include. there are various approaches that might be appropriate. and they are not necessarily mutually exclusive. negotiators have indeed considered all relevant issues. in practice. for example.Chapter III may tax income from foreign affiliates. A more elaborated version of this approach is to analyse each of these elements in greater detail and to determine how they contribute. singly or collectively. predictable and transparent investment climate. How and to what extent this objective can be served by international agreements that address investment issues is a question that is currently attracting considerable attention.of issues and concerns that can be consulted when negotiating international investment agreements. be they at the bilateral. an important issue is how the concerns of the principal actors in this regard -. strengthening domestic entrepreneurship. Given the congruences.8. home countries and investors -.e. an investment-friendly environment is also a development-friendly environment. The development-friendliness of investment agreements Development is the fundamental objective of developing country governments and of the international community as a whole. a phenomenon generally deemed not to be conducive to business transactions in general and FDI in particular (box III. regional. appears relevant. On the other hand.without a hierarchy among them -. but their very structure (i. overall design or plan) needs to reflect this objective. A second approach would be to identify a set of development objectives that international investment agreements should serve. such a catalogue would therefore include virtually all issues that need to be considered in the context of investment agreements. specific actions by the various parties involved).

Tr World Investment Report 1998: Trends and Determinants

The principal response of governments to the challenges of double taxation presented by increased FDI is the extensive and still widening network of bilateral tax treaties which has developed over the past 30 years. There are currently around 1,700 bilateral double taxation conventions in existence (IBFD, 1998).12 The OECD Draft Taxation Convention/ Model Tax Convention (1963/1977/1992) (OECD, 1997b), and the United Nations Model Double Taxation Convention between Developed and Developing Countries (1980) have provided the framework for the great majority of these bilateral treaties. These models are quite similar, the main difference being that the OECD model favours residence taxation while the United Nations model gives more weight to source taxation (Goldberg, 1983). The main purpose of international taxation agreements is to deal with tax rights and thus with the allocation of revenues between countries. The contracting countries seek a balanced trade-off between their interests. With respect to developing countries, the challenge as host countries is to find a suitable balance between receiving a share of revenues from foreign affiliates operating in their territory and maintaining a climate that attracts FDI. In this respect, it is generally supposed that, having a smaller share of revenues as a result of tax concessions would in the long run be compensated for by increased inflows of FDI, associated technology and other benefits that are part of the FDI package. For capital exporting countries, as home countries, it is important, on the one hand, to keep their firms internationally competitive by allowing them to benefit from tax concessions in a host country and, on the other hand, to treat all its residents (or taxpayers) equally. In sum, in examining international taxation with reference to FDI and corporate activity in general, and with respect to developing countries (which are by and large host rather than home countries) in particular, the following broad questions are raised: • • how to divide or share the revenues between host and home countries; what kinds of methods to adopt, or which types of measures to take, for the benefit of the host or source country (this is related, among other things, to the definition of “permanent establishment”); and what method to use in order to encourage FDI, taking into account the tax benefits,if any, granted in the source country.

From the perspective of investing firms, the binding nature of a tax treaty as an international agreement contributes to a secure basis for FDI; the certainty engendered by the inclusion of rules in a tax treaty is valuable, even in cases where this does not involve a revenue concession, especially where there is a background of unstable domestic tax legislation. By adopting a treaty, a country commits itself in cases of dispute to the objective of avoiding double taxation through a mutual-agreement procedure and adopts an internationally accepted approach to dealing with transfer-pricing issues. Firms and their employees can expect that treaties using the United Nations/OECD model frameworks will be interpreted and applied consistently with the published Commentary on the provisions of the Model Convention (United Nations, 1997). It is generally believed that although, in form, the countries conclude a bilateral treaty, in substance, by concluding a treaty using an accepted framework, they subscribe to international rules immediately familiar to taxpayers -- rules that promote stability, transparency and certainty of treatment. These features may be at least as important to firms as the particular concessions or incentives that a treaty may contain.


Chapter III

Double taxation treaties generally attribute the exclusive right to tax either to the country where income arises, or to the country of which the taxpayer is a resident. Alternatively, it may attribute this right to both, with an obligation imposed on the country of residence to provide relief for any resulting double taxation. Treaties are aimed not at establishing uniformity of application of taxes but at establishing tax criteria for the prevention of double taxation (Pires, 1989, p. 214). Typically, a double taxation treaty: • states its objective of resolving tax problems between contracting parties and determines its scope of application with regard to juridical or physical persons (ratione personae) and taxes (ratione materiae); sets out detailed allocation rules for different categories of income, e.g. income from real property, taxable without restriction in the source country; and interest income, subject to limited taxation in the source country;
Taxation Box III.9. Taxation principles Double taxation can arise in the case of the transnational operations of firms if both host and home countries claim the right to tax firms’ revenues. Two main principles underlie the jurisdictional basis of taxation: the first principle is related to the source of income or the site of economic activity (also known as the “territorial principle”); the second is related to the residence (or fiscal domicile) of the earning entity. According to the source principle, a country taxes all income earned from sources within its territorial jurisdiction. Under the residence principle, a country taxes the worldwide income of persons residing within its territorial jurisdiction. Varied criteria are used by countries to determine residence (e.g. for individuals, physical presence or home in a country; for corporations, place of management, head office or incorporation). Nearly all countries apply some combination of these two jurisdictional principles. Some Latin American countries, however, have traditionally taxed solely on the basis of the source principle. This is also a feature of the tax systems of South Africa and Hong Kong, China. Apart from these source and residence principles, the criterion of nationality is also applied by a few countries in the case of individuals. This is the case in the Philippines and the United States, whose tax systems combine that principle with the source and residence principles. Under the nationality principle, citizens of the United States, for example, are taxed on their worldwide income no matter where they reside. The United States likewise taxes aliens resident within its territory on their worldwide income and also taxes income derived by non-resident aliens from sources within its territorial jurisdiction. Firms incorporated in the United States, irrespective of the location of their head offices or seats or places of management and control, are taxed on their worldwide income, while foreign corporations are generally taxed solely on income derived from United States sources and effectively connected with a business such a corporation carries on in the United States. According to some views, taxation only on the basis of the source principle would encourage nationals or residents to invest abroad, thus leading to a flight of capital. It has been argued that countries using only the source principle have adopted it out of necessity because of the great difficulties their tax administrators would encounter if they attempted to find out how much foreign income was accruing to their residents. On the other hand, the residence principle, although based on overall capacity to pay, has proved to be of only limited significance in countries whose residents do not have substantial investments in other countries and whose fiscal administration is not well equipped to ensure its application.
Source: United Nations, 1997.


Tr World Investment Report 1998: Trends and Determinants

establishes the arm’s-length principle as the standard for the adjustment of transfer prices by tax authorities in the case of transactions between associated enterprises (box III.10); contains rules giving exemption from tax or credit for foreign tax in the residence country, where income is taxable in the source country; contains rules on non-discrimination, 13 mutual assistance and the exchange of information; establishes procedures for mutual agreement between tax authorities to avoid double taxation in cases of dispute; and occasionally contains provisions on assistance in the collection of taxes.

Transfer Box III.10. Transfer pricing and double taxation treaties Transfer prices -- the pricing of goods and services in international intra-firm transactions - raise complex problems not only for firms engaged in cross-border production, but also for the tax authorities concerned. This is because the allocation of costs and profits between parent firms and foreign affiliates across borders is an area particularly prone to double taxation, and transfer prices determine in large part the income and expenses -- and therefore taxable profits -- of associated firms in different countries. Tax authorities are concerned about the loss of tax revenues and foreign exchange as a result of transfer-price manipulation. On the other hand, the authorities recognize the variety of business circumstances involved and the inherent difficulties of comparing intra-firm and external transactions. Model conventions and most double taxation treaties contain a description of associated firms with a view to helping countries allocate business income in transactions between associated firms. Treaties give tax authorities the opportunity to make adjustments in the contracting country to which profits are under-reported. They treat each firm, whether parent firm or affiliate, as a separate entity, and the income of each firm is determined by treating it as though it dealt with every other firm at arm’s length. The most difficult issue in applying the arm’s-length principle is the policing of the prices set by associated firms for transfers of goods, services and intangible property among them. For this purpose, they describe associated firms in terms of common control, management, or capital investment, either between two entities or through a third party. Where the allocation of profits between associated firms located in different contracting countries is distorted as a result of that status, the countries to which an associated firm has underreported profit may impose an adjustment on that firm to accrue the amount underreported. In order to protect against double taxation, most of the treaties provide that, in the event that one contracting country should make an adjustment, the other contracting country should make an appropriate adjustment restoring, as a result, the aggregate profits of the associated firm to its original level. Double taxation treaties also provide for “multilateral agreement procedures” to discuss their adjustments and correct discrepancies. This mechanism is actually used for resolving any disagreements arising out of the implementation of a treaty in the broader sense of the term. Such a mechanism is a special procedure outside the legal and judicial system of each contracting country and applies in connection with all provisions of the treaty and, in particular, to provisions on associated firms. As a consequence, if an actual allocation is considered by the tax authorities to depart from the arm’slength standard and the taxable profits are redetermined, taxpayers are entitled to invoke the mutual agreement procedure in the framework of which the action by tax authorities can be considered.
Source: Plasschaert, 1994, pp.1-3; United Nations, 1997 and OECD, 1997b.


Chapter III

Effects 2. Effects of tax treaties
Tax treaties have their effects through the limitation of the contracting parties’ powers to tax. This is done in principle by devising methods for relieving double taxation. In existing treaties, two leading methods are followed for mitigating or eliminating double taxation (Muchlinski, 1995, p. 278). These are the exemption method and the credit method (box III.11). Tax treaties incorporating these methods adopt the following approaches. The source country exempts from taxation (or taxes at a reduced rate) certain categories of income but retains unrestricted taxation rights over other categories. Where the source country taxes at a reduced rate, the residence country gives a credit against its own tax for the tax imposed by the source country. Where the source country taxes without restriction, the residence country will either give a credit against its own tax for the tax imposed by the source country or exempt the income from its own tax.
III.11. Box III.11. Methods of relief from international double taxation In order to avoid double taxation, tax treaties include rules for its alleviation. In this respect, two main methods have commonly been used to mitigate international double taxation. The first is the tax-exemption method. So far as the income of firms is concerned, exemptions are confined by statute to profits of foreign permanent establishments and income from real property situated abroad. The main reason for the application of this method is that the exemption of foreignsource income from taxation by the country of residence may place the investor in a position of tax equality with residents of the source country, because the tax on that income is determined solely by the level of taxation in the source country. Thus, tax concessions granted by the source country are not reduced or cancelled by the tax of the investor ’s country of residence. Countries using the exemption method normally do not exempt dividends, interest and royalties from foreign sources from the domestic income tax. Many developed countries, however, grant special relief for domestic intercorporate dividends in order to eliminate or mitigate recurrent corporate taxation, first at the level of a foreign affiliate and then again at the level of the parent company. Some of these countries, either by internal law or by treaty, extend this exemption to dividends paid by a foreign affiliate to a domestic parent. When this method is applied within the framework of a bilateral tax treaty, one of the parties is granted the exclusive right to tax certain items of income. As in the case of unilateral exemption, the exemption by one party of all or part of an item of income may be integral or may occur with progression. In the case of full exemption, a country of residence might be forbidden to take the exempted item into account in computing its residents’ taxable income. The second method of double taxation relief is the credit method. Countries using this method reduce their normal tax claims on foreign profits by the amount of tax the investor has already paid thereon to the source country. The latter could thus raise its tax rate to the level of the tax of the country of residence without imposing an additional tax burden on the investor. Correspondingly, special tax concessions granted by the source country, which reduce that country’s level of tax below the level charged by the country of residence on that income, do not to that extent accrue to the investor ’s benefit. But this result is limited in its practical scope, since capital-exporting countries consider bona fide foreign affiliates engaged in production activities as being outside their national tax jurisdictions and do not tax their profits until they are repatriated in the form of dividends. Differences in definitions of taxable income used by host and home country tax authorities may create some difficulties. For instance, the home country authorities may define a corporation’s profit obtained in a certain country more narrowly than that country’s income tax authorities do, for example, as a result of differences in depreciation allowances or investment credits. The source country’s income tax may then be in excess of the tax that the home country would have assessed on that income, which is the upper limit on the tax credit allowed by the home country. Thus, even if the /...


Tr World Investment Report 1998: Trends and Determinants

The essential feature of the exemption method is that the investor’s country of residence exempts from taxation certain items of income from foreign sources. Exemption is mainly granted in respect of active income; passive income such as interest, royalties or dividends is generally taxed, with a credit being given for foreign taxes. The exemption-withprogression method has been used in treaties concluded by Austria, Belgium, Germany, Finland, France, Iceland, Luxembourg, the Netherlands, Spain and Switzerland. In contrast, the main feature of the credit method is that the investor ’s country of residence treats the foreign tax, within certain statutory limitations, as if it were a tax paid to itself. Within the framework of a bilateral treaty, each of the contracting parties levies income taxes, but the country of residence permits income taxes paid to the source country to be deducted from its own income taxes, with certain exceptions. The treaty usually indicates which taxes qualify for the credit. A variant of this method (called “matching credit method” or “tax-sparing method”) has been developed, according to which the country of residence grants a tax credit calculated at a higher rate than the tax rate currently applied in the source country. Tax-sparing clauses have been included in many bilateral treaties concluded with developing countries by most of the major home countries including Canada, France, Germany, Japan and the United Kingdom. An interesting feature found in recent treaties is reciprocal extension of tax-sparing credit. It is also indicated that the adoption of this method tends to be limited in scope (list of incentives) and in time duration.

III.11, (Box III.11, concluded) host country statutory tax rate is less than the home country rate, it is possible that some part of the host country tax may be disallowed as a credit against home country tax. In the case of dividends in respect of minor (portfolio) holdings in foreign companies, countries applying the credit method normally deduct from their own tax only the foreign tax levied on the dividends as such. However, in order to eliminate or mitigate recurrent corporate taxation, significant capital- exporting countries adopting the credit method allow as a credit against the corporate tax due from the parent company not only the tax levied on dividends by the country where the subsidiary operates, but also the corporate tax paid by the affiliate as far as it relates to profits distributed to the parent company (so-called “indirect tax credit” or “credit for underlying tax”). According to the credit method, the tax burden on investment abroad is the same as that on domestic investment, provided that the tax in the source country does not exceed that in the residence country. This tendency towards equality of tax treatment may have serious implications for developing countries’ efforts to attract FDI, since their tax incentives may be nullified. No consequences follow from the use of the credit method while profits from tax incentives are reinvested in the operating subsidiary. However, if such profits are repatriated, the benefit of incentives may pass from foreign investors to the governments of their countries of residence in the form of an increased tax yield. A method that avoids this problem is the tax-sparing method (referred to as matching credit methods), which can be found in treaties which have been signed by many developed countries, especially European countries, with developing countries. Quite often, the country of residence has granted a credit not only for the tax actually paid in a developing country, but also for the tax spared by incentive legislation in the host country. There is recent evidence of increasing reluctance on the part of developed countries to adopt the tax-sparing method in their tax treaties. Concerns about the effectiveness of tax incentives and the abuse of tax-sparing provisions have prompted a reconsideration of the use of the tax-sparing method in new treaties and renegotiations of existing treaties.
Source: United Nations, 1980 and 1997; and OECD, 1998b.


Chapter III

It is generally accepted that one of the most important effects of tax treaties is the legal certainty they provide to investors, in both the home and the host countries. Regardless of any changes affecting a host country’s tax system, foreign investors cannot be taxed beyond the levels allowed by a treaty. This effect is less comprehensive in the home country. In reality, certain changes in the home country tax system can affect the investor regardless of the existence of a treaty. For example, if the treaty provides for the credit method, a general increase in the corporate tax rate in the home country will also affect a resident deriving foreign-source income, regardless of the treaty. However, the exemption method, if adopted in the treaty, could not be modified at will by the home country. Tax treaties can have development implications and cannot, therefore, be fully separated from the context of various monetary, fiscal, social and other policies of contracting parties. When the parties are at the same or a similar level of development, the gain or loss of revenue resulting from reciprocal flows of investment does not have the same significance as when the parties are at different stages of development. The presumption of symmetries of gains and losses underlying tax treaties between countries at the same level of development is not applicable for countries at different stages of development. The loss of revenue may have a different “value” for a contracting party, depending on its level of development. For this reason, it could be argued that any eventual reduction in tax revenue from locally produced income should be offset by an increase in investment and technology flows. Since income flows are generally from developing to developed countries, a pattern of tax treaties in which the source country gives up revenue more often than not will not involve the rough symmetry of sacrifice which it might in tax treaties between developed countries. It should also be noted that developing countries, in their domestic laws, often introduce measures aimed at the alleviation of the tax burden of foreign investors, through a variety of tax incentives including income-tax exemptions, reduction or exemption of export proceeds, and reduction or exemptions of individual income taxes for foreign personnel. The benefits of these tax incentives for investors may exceed those resulting from tax treaties. These benefits are, however, offered unilaterally rather than in the context of an international agreement and it may be that foreign investors will value more highly the benefits of more modest reductions or exemptions given in the context of tax treaties with the attendant advantages of stability, transparency and certainty of treatment. From the perspective of host countries, having a smaller share of revenue, as a consequence of concessions offered either in domestic legislation or in the context of a tax treaty, could be (though it need not be) compensated for by increased flows of capital and technology into their economies as the result of an improved climate for FDI. A number of different views have been expressed on the role that the tax factor plays in attracting or inhibiting FDI (Plasschaert, 1994, pp. 46-47). Although this factor remains subsidiary to other factors, it is also generally accepted that, with the removal of barriers to FDI, taxation may gain more importance in investors’ decisions. Long-term investors may attach more importance to the general features of a country’s tax system than to its temporary incentives. In considering the role of the tax factor in attracting or inhibiting FDI, it may be important to distinguish the significance of incentives from that of other features of the tax system such as stability, transparency and certainty of treatment. Still, other things being equal, the tax factor could play a determining role in the choice of an FDI location and this in turn could give rise to a tax competition for investment (OECD, 1998b) (box III.12).


Tr World Investment Report 1998: Trends and Determinants

Tax Box III.12. Tax competition The international tax environment is evolving as a result of the removal of capital controls and the continuing liberalization of financial markets, aided by the development of new communication technologies. As obstacles to the flow of capital are reduced, business decisions such as financing and investment have become more sensitive to tax differentials. As a response to these developments, governments of both developed and developing countries have become more inclined to use the tax regime to attract FDI, as evidenced by the rapid spread of preferential tax regimes. Preferential tax regimes have in common the opening up of profit-shifting possibilities without corresponding shifts in real activities. While these regimes were typically found in tax havens in the past, they have been adopted in recent years by an increasing number of other countries. Once one country introduces such a regime, others may find it necessary to respond with similar measures, thereby triggering a “race to the bottom” in the corporate tax field. This form of tax competition is viewed by an increasing number of countries as harmful because it distorts the flows of capital and reduces the tax base, making investment decisions tax-driven rather than commercially-driven. Recognizing that these issues can be effectively addressed only through international cooperation, both the European Union and the OECD have recently adopted non-binding instruments for dealing with harmful preferential tax regimes. These instruments, the European Union’s Code of Conduct (European Union Council, 13559/97/FIS 167) and the OECD Guidelines (OECD, 1998b), take as a starting point whether a jurisdiction imposes no or low effective taxes in identifying a harmful preferential tax regime. Other criteria considered include whether a regime is “ring-fenced” (i.e. whether it is partly or fully isolated from the economy of the country providing the regime), whether its operation is non-transparent; and whether the jurisdiction operating the regime fails to exchange information with other countries. While the European Union Code and the OECD Guidelines differ in some respects (the main difference being that the OECD Guidelines are limited to financial and other service activities, while the European Union Code covers all types of business activities), the general view is that they are broadly compatible and mutually reinforcing. Both instruments emphasize the importance of associating non-OECD countries with them. This reflects the concern that, unless the principles behind these instruments are widely accepted, the implementation of these instruments may provoke a displacement of activities to non-OECD countries. In addition to the Guidelines, the OECD has agreed on a number of recommendations to counter the harmful effects of tax competition. One of these recommendations proposes the development of an OECD tax haven list by October 1999. The objective is to identify and list, on the basis of certain criteria, tax jurisdictions that constitute “tax havens”. Other recommendations are:

Domestic level - that countries that do not have controlled foreign corporation rules or equivalent rules consider adopting them and that countries that have such rules ensure that they apply in a fashion consistent with the desirability of curbing harmful tax practices; - that countries that do not have foreign investment fund rules or equivalent rules consider adopting them and that countries that have such rules consider applying them to income and entities covered by practices considered to constitute harmful tax competition; that countries that apply the exemption method to eliminate double taxation of foreign source income consider adopting rules that ensure that foreign income that has benefited from tax practices deemed as constituting harmful tax competition does not qualify for the application of the exemption method; - that countries that do not have rules concerning reporting of international transactions and foreign operations of resident taxpayers consider adopting such rules; - that countries exchange information obtained under these rules; - that countries in which administrative decisions concerning the particular position of a taxpayer may be obtained in advance of planned transactions make public the conditions for granting, denying or revoking such decisions; and /...


Chapter III

3. The universe of double taxation treaties14
The number of double taxation treaties (DTTs) has increased rapidly in the past four decades (figure III.3). By the end of 1997, 1,794 treaties, 15 covering 178 countries and territories, were in existence Cumulative number Figure III.3. Cum ulative n umber of DTTs and BITs, 1960-1997 (figure III.4). This compares with 1,513 BITs involving 169 countries at the end of 1997. Between 1960 and 1997, the rate of increase for DTTs has been steady while the rate of increase for BITs rose sharply in the late 1980s. Originally, DTTs were concluded mainly between developed countries. Over the Source : UNCTAD, database on BITs and database on DTTs. years, however, as first the developing countries and then the economies in transition became important host countries for FDI and also emerged as home countries, the universe of tax treaties expanded also to include them (figure III.4). The increased participation of

(Box III.12, concluded) that countries, in the context of counteracting harmful tax competition, should review their laws, regulations and practices which govern access to banking information with a view to removing impediments to accessing such information.

Tax treaty level - that countries should undertake programmes to intensify the exchange of relevant information concerning transactions in tax havens and preferential tax regimes constituting harmful tax competition; - that countries consider including in their tax conventions provisions aimed at restricting the entitlement to treaty benefits for entities and income covered by measures constituting harmful tax practices and consider how the existing provisions of their tax conventions can be applied for the same purpose; - that countries consider terminating their tax conventions with tax havens and consider not entering into tax treaties with such countries in the future; and - that countries consider undertaking coordinated enforcement programmes (such as simultaneous examinations, specific exchange-of-information projects or joint training activities) in relation to income or taxpayers benefiting from practices constituting harmful tax competition.
The recommendations also envisage that the OECD Model Tax Convention be modified to include such provisions or clarifications as are needed in respect of the earlier recommendations. To this effect, it is recommended that the Commentary on the Model Tax Convention be clarified to remove any uncertainty or ambiguity regarding the compatibility of domestic anti-abuse measures with the Model Tax Convention.
Source : OECD, 1998b.


Tr World Investment Report 1998: Trends and Determinants

developing countries and economies in transition has not been limited to concluding agreements with developed countries.16 Indeed, since the 1980s, DTTs are increasingly being concluded between developing countries and between economies in transition (figure III.5). Other salient features of the universe of DTTs are (figures III.3-7): *

Figure III.4. Number of countries and territories with DTTs, 1960-1997

Whereas the top 10 countries with the highest number of BITs Source : UNCTAD, database on DTTs. include two developing countries (China and the Republic of Korea) and two economies in transition (Romania and Poland) (UNCTAD, 1998b), all of the top ten countries with the highest number of DTTs concluded are developed countries. The most prolific countries concluding DTTs in the 1990s have been the economies in transition. The leaders are Poland and Hungary, with 59 and 53 treaties respectively. Of the economies in transition in Central Asia, Kazakhstan led with 17 treaties. The region also has the second highest number of DTTs per country and the third highest number of intraregional DTTs. Thirty-five African countries have signed a total of 247 DTTs. Of these, only 26 are with other African countries. The average number of DTTs per country grew rapidly for North Africa in the 1970s and 1980s, most of the growth being attributable to Egypt, Morocco and Tunisia. Countries in Asia and the Pacific intensified their DTT activity in the 1980s. During the 1960s they had signed only 29 tax treaties and hence had a by Figure III.5. Number of intraregional DTTs, b y region, very low average number of 1960-1997 treaties per country in the region. Since then, 43 countries have signed a total of 560 treaties. Part of the growth in this number includes a substantial increase in the number of DTTs concluded within the region. Not surprisingly, the most active in the region were the East Asian countries. Latin American and Caribbean countries have signed a total of





Source :

UNCTAD, database on DTTs.


Chapter III

218 treaties, but only 9 of these are intraregional. Argentina and Brazil lead the region with 27 and 21 treaties, respectively. This region has one of the lowest number of DTTs per country. * The United States has signed 154 DTTs, the highest number of any developed country, followed by the United Kingdom with 148 treaties.

concluded: Figure III.6. Number of DTTs concluded: top 20, 1997

If the universe of DTTs is compared with the universe of BITs it needs to be kept in mind that both types of treaties have specific but distinct purposes. The principal purpose of DTTs is to deal with Source : UNCTAD, database on DTTs. issues arising out of the allocation of revenues between countries; the principal purpose of BITs is to protect the investments that generate these revenues (and they do not deal with tax issues). They are therefore complementary. As developed countries were traditionally the principal home and host countries, DTT issues arose primarily between them, which is why most of the earlier DTTs were between developed countries. As developing countries were seen to involve certain risks for investors, BITs were initially concluded primarily between developed and developing countries; there are no BITs between developed countries. In the early 1960s, developed countries had signed 71 of 72 BITs with a developing country partner, whereas for DTTs the comparable number was Avera number verag country by Figure III.7. Avera g e n umber of DTTs per countr y, b y 35 per cent. The differences in purpose decade, region and decade , 1960s-1990s have also manifested themselves at the country level. Perhaps the most significant observation in this regard is that some countries with a high propensity to sign tax treaties have a low propensity to sign BITs. For example, the United States, by the end of 1996, had signed only 39 BITs, but had signed 154 DTTs. Similarly, India had signed 72 DTTs, but only 14 BITs. As developing countries became outward investors, and a good part of their investment was in other
Source :
UNCTAD, database on DTTs.


Tr World Investment Report 1998: Trends and Determinants

developing countries (especially in Asia), they also began to conclude both types of treaties. The regional and intraregional distribution of DTTs compared with that of BITs is, therefore, becoming more similar, with the exception of the number of treaties signed between developed countries (figures III.2 and III.8).

concluded by country Figure III.8. DTTs conc luded in 1997, b y countr y group gr oup a

In general there is a positive relationship between the number of tax treaties and BITs signed by countries, a relationship that strengthened significantly in the 1980s and further in the 1990s (figure III.9).17 Developed countries have almost the same propensity to sign both BITs and tax treaties (921 and 1,222); the same applies Source : UNCTAD, database on DTTs. to countries from Africa (326 and 272), Asia a In 1997, 108 DTTs were concluded. and the Pacific (684 and 584) and Latin America and the Caribbean (330 and 228). Only the economies in transition have some catching up to do, having signed 770 BITs and only 299 DTTs.
by by decade, Figure III.9. The correlation between DTTs and BITs signed b y countries, b y decade , 1960s-1990s

Source :

UNCTAD, database on DTTs and BITs.


Chapter III

In sum, the universes of BITs and DTTs, although having started from different points and for different -- but complementary -- purposes, are evolving in the same direction. The propensity to sign both types of treaties has increased -- a reflection of the growing role of FDI in the world economy and the desire of countries to facilitate it.

1 2

3 4 5

6 7 8 9 10






The absence of a specific FDI law or code does not mean that there are no national laws bearing on FDI, in one way or another. Frequent amendments of laws can cast doubts on the stability of a national legal regime, but the changes in FDI regimes referred to here are mainly in the direction of facilitating and attracting FDI and are thus contributing to improving the countries’ investment climate. As the granting of incentives can distort investment flows, their reduction has -- from this perspective -a similar effect as, for example, a decrease of barriers to FDI. On changes in FDI regimes before 1991, see UNCTC, 1978-1994. According to article 5.1 of the TRIMs Agreement, WTO members, within 90 days of the date of entry into force of the WTO Agreement, shall notify the Council for Trade in Goods of all TRIMs they are applying that are not in conformity with the provisions of the Agreement. “Declaration of Santiago”, Santiago, Chile, 19 April 1998, mimeo.. Ministerial Declaration of San Jose, 19 March 1998, annex II. “Working Programme for the FTAA Negotiating Groups” (FTAA, TNC/01), p. 5. The joint statement of NGOs arising from that meeting was endorsed by over 600 development, consumer, environment, citizens, human rights and indigenous people organizations (WWF-UK, forthcoming). The position of NGOs with respect to the MAI is reflected, among others, in Clarke, 1998; CI, 1996; CUTS, 1996; European Parliament, 1998; FOE-I, 1998; Korn, 1997; Oxfam, 1998; Public Citizen, 1998; WCC, 1998: WDM, 1997; WGA, 1997; WWF-International, 1996, 1997, 1998a, 1998b; WWF-UK, forthcoming. These efforts build on previous initiatives in the United Nations. Indeed, as early as 1978, the United Nations Economic and Social Council negotiated an “International Agreement on Illicit Payments”. In 1979, an almost complete draft of the Agreement was transmitted to the General Assembly which, however, decided to take no action on it (UNCTAD, 1996b, p .103). A broad definition of double taxation treaties (apart from agreements on income and capital) would include bilateral agreements on inheritance, gifts and air or sea transport. These agreements generally contain rules with fiscal implications. The non-discrimination clause is generally understood as a national treatment clause. The clause prohibits a treaty partner from granting to nationals of the other contracting party a treatment more burdensome than that granted to its own nationals, provided the former are in the same situation as the latter or a substantially similar one. It further ensures that none of the contracting parties treats companies in a differentiated way depending on whether their capital is held by its own nationals or by nationals of the other treaty partner. Mention should be made of the long-standing acceptance of the principle of nondiscrimination in international fiscal relations. In fact, long before the emergence of the double taxation treaty at the end of the nineteenth century, the principle of non-discrimination in fiscal matters had been embodied in many different types of international agreements under which each contracting party granted nationals of the other contracting party the same treatment as its own nationals (consular or establishment conventions, treaties of friendship or commerce, etc.). The international community has been dealing with the question of double taxation since 1928. For instance, the League of Nations was involved in the elaboration of rules governing the taxation of firms operating in two or more countries. In 1935, a draft convention was prepared. This total includes 26 multilateral treaties, but neither model treaties nor the treaty between France and Quebec.


Tr World Investment Report 1998: Trends and Determinants

16 17

In this analysis, economies in transition include those in Central Asia. A simple regression yields estimated positive coefficients ranging between 0.26 and 0.43, with the highest coefficient for the 1990s. All were significant at the .05 per cent level. There was a jump in the constant term in the regressions that should also be noted. In the 1960s regression it was 1.054, but in the 1980s regression for the 1960s it was 3.133.


i. This may be the case for several reasons. Finally.g. if they exist at all. For one. and may involve significant transaction costs or time-lags. proprietary technology) of a firm -.e. If the third condition is added to the first.g. If only the first condition is met. firms will rely on exports.if exploited optimally -.g. 1993a):1 the presence of ownershipspecific competitive advantages in a transnational corporation (TNC). licensing or the sale of patents to service a foreign market. through FDI rather than arm’s-length transactions. • • While the first and third conditions are firm-specific determinants of FDI. it may be in a firm’s interest to retain exclusive rights to assets (e.can compensate for the additional costs of establishing production facilities in a foreign environment and can overcome the firm’s disadvantages vis-à-vis local firms. monopoly rents). knowledge) which confer upon it a significant competitive advantage (e. large markets or lower costs of resources or superior infrastructure). The ownership-specific advantages of the firm should be combined with the locational advantages of host countries (e. FDI becomes the preferred mode 89 .Chapter IV CHAPTER IV COUNTRY HOST COUNTRY DETERMINANTS OF FOREIGN DIRECT INVESTMENT It is widely agreed that foreign direct investment (FDI) takes place when three sets of determining factors exist simultaneously (Dunning. the firm finds greater benefits in exploiting both ownership-specific and locational advantages by internalization. the second is location-specific and has a crucial influence on a host country’s inflows of FDI. the presence of locational advantages in a host country. For another. knowledge or management) may be imperfect. and the presence of superior commercial benefits in an intra-firm as against an arm’s-length relationship between investor and recipient. markets for assets or production inputs (technology. • The ownership-specific advantages (e.g.

Typically. locational determinants are the only ones that host governments can influence directly. regional or multilateral levels -.g. these measures are receiving increased attention.2 To explain differences in FDI inflows among countries and to formulate policies to capture inbound investment. see table IV. The relative importance of different location-specific determinants depends on at least four aspects of investment: the motive for investment (e. This need has become all the more topical as discussions and negotiations on international investment frameworks -.g. their changing significance in the context of liberalization and globalization are reviewed next. FDI involves a long-term commitment to a business endeavour in a foreign country. As distinct from trade. but only in the presence of location-specific advantages. the sector of • 90 .whether at the bilateral. new or sequential FDI). Within the trinity of conditions for FDI to occur. Although the analysis that follows treats each of the three sets of determinants separately. The objective of this chapter is therefore to review the location-specific (host-country) determinants of FDI flows and stocks and to analyze how these have changed in a liberalizing and globalizing world economy. it is necessary to understand how TNCs choose investment locations.1. the interrelationships among them must be borne in mind. and the chapter ends with a review of issues related to the impact of international investment frameworks. why and how international investment agreements matter for the location of FDI and the activities of TNCs. The impact of international investment frameworks on FDI is examined separately. Then follows a review of business facilitation measures: as the world economy becomes more open to international business transactions. countries compete increasingly for FDI not only by improving their policy and economic determinants. a multilateral framework on investment might have for the growth and pattern of FDI. Economic determinants and. the type of investment (e.have gathered momentum and the possibility of a multilateral framework on investment has raised questions as to whether. a key question (one similar to that faced by the creators of the post-Second World War multilateral trading system) is what effect.) Several caveats are required before reviewing the FDI determinants: • Direct investment abroad is a complex venture. if any. While not as important as the other two sets of determinants. This review of host country determinants begins with the role of national policies and especially the liberalization of policies (a key factor in globalization) as FDI determinants. in particular. (For a graphic overview of host country determinants of FDI. but also by implementing pro-active facilitation measures that go beyond policy liberalization. resource-seeking or marketseeking FDI). It often involves the engagement of considerable assets and resources that need to be coordinated and managed across countries and to satisfy the principal requirements of successful investment.Tr World Investment Report 1998: Trends and Determinants of servicing foreign markets. licensing or portfolio investment. In particular. since that is a matter of special interest to countries in the light of recent international discussions. there are many host country factors involved in deciding where an FDI project should be located and it is often difficult to pinpoint the most decisive factor. such as sustainable profitability and acceptable risk/profitability ratios.

at spreading or reducing risks. the market-seeking motive can translate. for example. and matching competitors’ actions or looking for distinct sources of competitive advantage. Policy framework for FDI classified Type of FDI c lassified b y motives of TNCs A. etc. roads. Resource/ asset-seeking II. the same motive and the corresponding host country determinants can acquire different meanings.1. Business facilitation Efficiency-seeking C. stand a good chance of attracting FDI. In the context of different strategies. firms and clusters physical infrastructure (ports. it can aim at diversifying markets as part of a riskreducing strategy. and for still another TNC. Efficienc y-seeking • • • • • • • • investment promotion (including imagebuilding and investment-generating activities and investment-facilitation services) investment incentives hassle costs (related to corruption. • As a general principle.g. political and social stability rules regarding entry and operations standards of treatment of foreign affiliates policies on functioning and structure of markets (especially competition and M&A policies) international agreements on FDI privatization policy trade policy (tariffs and NTBs) and coherence of FDI and trade policies tax policy • • • • • • • • • • market size and per capita income market growth access to regional and global markets country-specific consumer preferences structure of markets raw materials low-cost unskilled labour skilled labour technological. in the case of another TNC. host countries that offer what TNCs are seeking. It is therefore entirely possible that a set of host country determinants that explains FDI in a particular country at a given time changes as the structures of its domestic economy and of the international economy evolve. and/or host countries whose policies are most conducive to TNC activities. e. there are also location-specific determinants that remain constant. telecommunication) cost of resources and assets listed under B. At the same time. Host countr y determinants of FDI able IV. including as embodied in individuals. adjusted for productivity for labour resources other input costs. These strategies aim. country country Host countr y determinants I. power. Market-seeking Principal economic determinants in host countries • • • • • • • • economic. in the case of one TNC. pursuing oligopolistic competition.Chapter IV investment (e. But firms also see locational determinants in their interaction with ownership-specific and internalization advantages in the broader context of their corporate strategies.) after-investment services 91 . etc. This points to the need for host countries not only to understand the motives of potential investors but also to understand their strategies. innovatory and other created assets (e.1. administrative efficiency. it can translate into the desire to acquire market power. In the analysis that follows.) social amenities (bilingual schools. The relative importance of different determinants also changes as the economic environment evolves over time. Economic determinants III. services or manufacturing) and the size of investors (small and medium-sized TNCs or large TNCs). transport and communication costs to/from and within host economy and costs of other intermediate products membership of a regional integration agreement conducive to the establishment of regional corporate networks Resource/ B.3 Tab le IV. For example. brand names).g.g. quality of life. only the most important host country determinants will be examined. into the need to enter new markets to increase the benefits arising from multiplant operations.

FDI policies are usually accompanied by other policies that also influence investors’ decisions. 1997a). It has two dimensions: an FDI-policy dimension and a competition-policy dimension. These policies can range from outright prohibition of FDI entry to non-discrimination in the treatment of foreign and domestic firms -. • Policies used intentionally to influence FDI and its location constitute the “inner ring” of the policy framework for FDI. in industries characterized as natural or near-natural monopolies. the standards of treatment accorded to them. The competition-policy dimension becomes relevant if. On the other hand. Taiwan Province of China and (previously) Japan were embedded in a broader set of industrial policies guiding and selectively inducing TNCs to link up with local firms to help increase local innovative and export capacities (UNCTAD.Tr World Investment Report 1998: Trends and Determinants A. The national FDI policy framework Core FDI policies consist of rules and regulations governing the entry and operations of foreign investors. Among these supplementary policies used to influence locational decisions. Asian countries. influencing its sectoral composition or geographical origin. Globalization has led to yet further changes affecting the FDI framework which are discussed in greater detail in subsection 2 below. the sale of a privatized company to a domestic or foreign investor only means the transfer of a monopoly from the state to a private agent (UNCTAD. For example.reducing or increasing FDI. to attract FDI and to maximize its contributions to their import-substituting development strategies. it broadens the scope of FDI. It focuses first on the role of liberalization in attracting FDI and then addresses the question of how the role of regulation has changed in a liberal global environment. The following section discusses FDI policy itself as a host country determinant. This has become obvious since the broad-front advance of more market-based economic policies began in the mid-1980s. For example. coupled with more liberal trade policies. Hong Kong. exemptions from import duties) to encourage TNCs to contribute to their export-oriented economic strategies. Some of them focus on insurance and protection. The features of such a framework vary among countries and also vary over time in the same country. trade policy plays the most prominent role. in contrast. To achieve these objectives. and the functioning of the markets within which they operate (UNCTAD. China pursued laissez-faire trade and FDI policies. Core FDI policies themselves have become more liberal and. 92 . the FDI policies of such economies as the Republic of Korea. encouraging specific contributions to the economy and affecting ways in which these contributions are made. used both FDI and trade policies (e. 1996a and 1997a). while others deal with broader issues (UNCTAD.and even preferential treatment of foreign firms. as it involves purchases of firms from the state. have contributed to a more cohesive policy framework.g. countries in Latin America used a mix of protectionist trade policies combined with policies allowing FDI in manufacturing. Other related policies may include privatization policies and policies determined by the international agreements a country has signed: • Privatization is a special case of acquisition. 1996b). If privatization welcomes foreign investors. They typically satisfy various objectives -. 1995a). International investment agreements provide an international dimension to national FDI policies.

1995). pp. given the very high exchange value of the Canadian dollar coupled with relatively low productivity. An econometric investigation of the effects of FIRA on the flow of United States direct investment into Canada found only a weak evidence of a negative impact (Kudrle. table XXI). FIRA was established as a result of rising government and popular concern with the high share of TNC sales and assets in a number of crucial industries of the Canadian economy. more than 3. Box IV. however. and not all FDI inflows.but the inducement may not be taken. that policy changes in the direction of openness differ in an important way from those in the direction of restriction: even when extensive. Reviewing FDI in Canada With the passage of the Foreign Investment Review Act (FIRA) in the early 1970s. 1985. Source: UNCTAD. a Another reason for the decline in foreign ownership could be the relative unattractiveness of Canada as a site for exportoriented manufacturing. from the Phillips Petroleum Company of the United States by Petro-Canada at a total cost of about $1. 1985. can effectively close the door to FDI. they cannot guarantee their desired results.600 proposed foreign investments had been reviewed. 3). 93 . Minister of Supply and Services. There was also no evidence suggesting that FIRA operated successfully as a discriminating monopsonist in its dealings with United States firms. Open policies are basically intended to induce FDI -. Ltd. Minister of Supply and Services. FIRA may well have had a greater impact on Canada’s popular image as a host to FDI than on either the volume or profitability of investment.1.5 billion in 1978 and 1979. 19). FIRA was found to have affected directly only new business cases and acquisitions.1. The rate of rejections and withdrawal was much higher in resource-based industries and in services than in manufacturing: 20 per cent and 19 per cent. Its potential relevance is also evident when policy changes sharply in the direction of more or less openness. on the other hand. against 8 per cent (ibid. The overall conclusion was that while more accurate measures of the existing variables or the addition of other variables might provide evidence of a more significant negative impact. respectively. perhaps in anticipation of non-approval. It provided for a Foreign Investment Review Agency to advise the minister responsible for the administration of the Act to decide whether a proposed foreign investment would provide “…significant benefit to Canada…” (ibid. Restrictive policies. of which 84 per cent were allowed and 16 per cent were either rejected or withdrawn.. Foreign-owned firms declined in importance “… as a result of changes in ownership mainly through government and private acquisitions…” (Canada.) IV.Chapter IV 1.. The Act required a review of “… most acquisitions of control by non-Canadians of existing businesses in Canada … and the establishment of new businesses in Canada by non-Canadians who either did not already have a business in Canada or did not have a business to which the new business was or would be related” (Canada. The Act and the purchases were not completely independent events: by reducing foreign firms’ opportunities for growth. Among others. The reduction in foreign ownership resulted not only from the restrictions on new FDI contained in the Act but even more from the purchases of foreign-owned assets by Canadian public enterprises.3). 1980. By the time the Act was repealed in 1985. It should be noted. such as sweeping nationalizations of foreign affiliates. Statistics Canada. FIRA might have affected FDI from other countries more unambiguously than United States FDI.1. FDI policy as a determinant The importance of core FDI policy as a determinant is best illustrated by the obvious fact that FDI cannot take place unless it is allowed to enter a country. p. even though the restrictions on inward investment were largely removed in the 1980s. p. the Act increased the willingness of foreign parent firms to sell Canadian affiliates and lowered the prices that Canadian entities had to pay for them. (For the effects of more moderate restrictive policies. a This single acquisition reduced the foreign share of Canadian assets by 1. 19-25). see the discussion of Canadian FDI policy in box IV.6 percentage points and was accompanied at about the same time by a private purchase that caused Husky Oil limited to be reclassified from United States to Canadian control (Canada. The foreign share in Canadian output declined from the early 1970s through at least 1992. such as the purchase of equity in Pacific Petroleums. Canada began to review inward FDI. However. although not by a great deal. p. as radically restrictive policies can pretty much guarantee theirs.

These examples underline the fact that open FDI policies are a necessary.2. The liberalization of FDI policies /. Box figure . similar changes in FDI policies have not had similar effects on FDI. however. where inward FDI stock rose from $3 billion in 1985 to $169 billion in 1997 (chapter VII). Box IV. table III. but FDI inflows remain low. A case in point is Africa. it had risen to $66 billion by the end of 1997 (chapter IX).g. barriers to entry and operations) and from the granting or withholding of incentives and subsidies that discriminate in their favour or against them.. In China’s Guangdong Province. 1998). 94 per cent contributed to creating more favourable conditions for FDI (chapter III.2 and box IV. 94 . despite the impressive performance of the region as a whole.2. but not a sufficient. Blomström and Ramstetter. discriminatorily) to foreign investors (e. host country determinant of investment. The process of liberalization of FDI policies Defining FDI liberalization FDI liberalization is a dynamic process that involves the following (box figure): (a) the tempering or removal of those market distortions that result from restrictions applied specifically (and. the foreign-owned share of industrial production rose from 8 per cent in 1990 to 33 per cent in 1993 (Lipsey. IV.2). Box figure.. Perhaps the most significant change in FDI performance has occurred in China.Tr World Investment Report 1998: Trends and Determinants Since the mid-1980s. The most conspicuous example of the importance of FDI liberalization as a locational determinant (but by no means the only one) is the experience of Central and Eastern Europe. the liberalization of FDI frameworks has become the dominant type of FDI policy change: of the 151 FDI policy changes that occurred during the period 1991-1997. where regulatory frameworks in most countries are quite open (chapter VI). In other countries. the leader in FDI liberalization. where the liberalization of FDI policies has had little effect on FDI flows. hence. Other cases are furnished by some countries in Central and Eastern Europe. The stock of FDI in that region was less than $200 million in 1985 and less than $3 billion in 1990.

fishing. A properly functioning legal order. especially. a variety of restrictive measures have also been used to attract FDI. mining. is not the only possible method of attracting FDI. overall. required mainly in return for incentives. for example. broadcasting. Ownership requirements and control restrictions (through. as liberalization progresses. Liberalization. How far has the liberalization of FDI gone? restrictions Reducing restrictions Today. Certain types of performance requirements have been reduced or have become more transparent as a result of international commitments and transitional measures under the TRIMs Agreement (see chapter III above). However.g. certain aspects of the internal normative framework. given the close interlinkages between FDI. Moreover. oil and energy). It follows from the foregoing that. often in the course of their privatization programmes (e. the liberalization of FDI regimes does not imply a weakening of the role of government. 95 . The distinction is not an easy one in practice. “golden shares”) are limited to certain strategic industries.are becoming less significant. Indeed. 1994a).such as performance requirements or those relating to the hiring of foreign managerial personnel .g. nor is it necessarily the most effective one under all conditions. public transport. as most countries have gradually moved to open traditionally closed industries. but rather a redefinition of some of its functions and the strengthening of others. banking and finance. for example.g..g. disclosure of information. (Box IV. it becomes increasingly visible. While the first two elements are indeed central to FDI liberalization. competition rules. is also required to ensure predictability and certainty of business operations.Chapter IV IV. A distinction must be drawn between policies aimed at liberalizing FDI and policies aimed at creating a favourable investment climate and. although some restrictions remain. On the other hand. closing the market for further entry. the liberalization of FDI involves difficult policy choices among desired outcomes and significant trade-offs between objectives (UNCTAD. most-favoured-nation treatment. for maximum effect. all countries admit FDI in principle. and (c) the strenghtening of market supervision to ensure the proper functioning of the market (e. There are also indications that certain operational conditions . telecommunications) and often apply to both foreign and domestic firms.2.2.. These have also become more targeted and tend to discriminate less either in favour of or against foreign investors.g. the policy frameworks for all three would need to be consistent and moving in the same direction. not covered under the TRIMs Agreement. Most countries have eliminated authorization requirements for the entry of greenfield FDI. trade and the dissemination of technology. are essential to give meaning and effect to the liberalization of FDI. national treatment. broadcasting). The broader context within which foreign affiliates operate inside a country is also relevant and. other public utilities and the construction of public infrastructures. especially in the manufacturing sector but also increasingly in natural resources and services. Fade-out requirements have virtually disappeared. The two types of policies are closely linked in a means-end relationship: the principal objective of both is to attract FDI. have become more focussed and tend to be voluntary. at attracting or promoting FDI. no single country grants unrestricted right of entry to all activities. including well-functioning courts. the number of activities in which FDI is barred or restricted has been considerably reduced. although some authorization requirements and restrictions on the number of foreign firms allowed remain in many countries (both developed and developing) for some “strategic” industries (e. In a number of developed countries /. continued) (b) the strengthening of certain positive standards of treatment for foreign investors (e. Others. telecommunications. however. Indeed. particularly after privatization (e. fair and equitable treatment). replacing them with registration. such as the existence of a comprehensive legal framework for business activities. their overall beneficial effects depend to a considerable extent on the presence of effective supervision of the market. air transport. prudential supervision).

although numerous and at times significant differences remain. towels or toothbrushes -.other things being equal -become more important influences on the locational decisions of investment projects. Policy liberalization is a necessary but not a sufficient determinant of FDI and other determinants have to come into play for investment to flow into the country. The reason for the ineffectiveness of FDI liberalization in such cases is not necessarily the absence of locational advantages but the scarcity of firms with ownership-specific advantages and. To the extent that FDI policy frameworks become similar. IV. especially in industries characterized by simple technologies. 96 . FDI but there is no guarantee that investment will actually occur. figure V. Most have also established mechanisms to supervise international mergers and acquisitions.Tr World Investment Report 1998: Trends and Determinants Similar variations in the effects on FDI flows may be found when sectoral policies are liberalized. (Box IV. as are the principles of due process and fair and equitable treatment. concluded) (for example. standardized goods.1). In brief. and financial markets. The number of countries having competition laws has increased from less than 40 in 1980 to over 70 in 1997 (UNCTAD. as exemplified by the rapid increase of the share of these industries in the total outward FDI stock of the United States from below one per cent in 1990 to nearly three per cent in 1996. after most countries in Latin America and in Central and Eastern Europe took to signing them. 1997a. In communications and public utilities. lack of motive to internalize them. in others not. on the other hand. among members of the European Union) certain types of incentives are now prohibited or subject to ceilings. specific differences -. stock exchanges. A liberal policy framework “determines” FDI in the sense that it enables TNCs to invest in a host country: it allows.2. where there are advantages. The number of developing countries that have signed bilateral. the TNC response to policy liberalization has been swift. Most restrictions on outward FDI have also disappeared in developed countries and are being gradully reduced in a number of developing countries and transitional economies. Strengthening treatment Str engthening positive standards of treatment The standards of non-discrimination and national treatment of FDI after its entry into the host country are now reflected in the laws and international agreements of many countries (often with certain qualifications and exceptions).those producing pencils. Source : UNCTAD. including many developing countries. are also granting foreign investors legal protection and guarantees against non-commercial risks. In some industries liberalization has produced rapid and significant responses by foreign investors. Strengthening controls Str engthening market contr ols An increasing number of countries in all regions have adopted or are strengthening antitrust laws. Exchange restrictions on the repatriation of profits and capital have become exceptional measures reserved for cases of serious balance-of-payments difficulties in most countries.2. regional and multilateral agreements dealing with the treatment and protection of FDI after entry has increased dramatically in the 1990s.liberalization has not led to more FDI and trade and domestic production have remained the dominant modes of serving local markets. intense competition and low transportation costs -.4 In manufacturing industries. the negative effects of restrictive policies are much stronger than the positive effects of liberal policies. and may even encourage. Host countries. In sum. the trend towards a liberalization of FDI policies is indeed pervasive and has led to a convergence of FDI regimes.

The impact of globalization The relationship between FDI policies and globalization runs both ways: each affects the other. it was the liberalization of national policy frameworks that helped unleash one of the key driving forces of globalization as we know it today: increasing international production by TNCs. outer-ring policies can be divided into macroeconomic and macroorganizational policies: Macroeconomic policies . The outcome of all this is that. as well as technological progress in telecommunications and transportation. 1993a). host countries have increasingly come to realize the importance of adopting proactive measures to facilitate business transactions by foreign investors and of improving the economic determinants of FDI. permitted TNCs to pursue increasingly regional and global strategies.g. At the same time. Indeed. as outer-ring policies move into the inner ring. which in turn creates incentives to liberalize FDI policies. Since they determine interest rates and thus the cost of capital in a host country. which determine the parameters of economic stability such as the rate of inflation and the state of external and budgetary balances. These are mainly monetary and fiscal policies. influence all types of investment. such as the establishment of fully owned subsidiaries. as distinct from the core policies directly used to influence FDI. This has. although the effects of interest rates on FDI are smaller than on domestic investment because TNCs normally have a greater choice of sources of financing. (The dividing line between these two types of policies is increasingly being blurred. Competing intensely with one another for FDI and finding that liberal policies are no longer enough. The accelerating process of FDI liberalization has led countries to extend more open policies into industries long considered sensitive (e.5 97 . including those affecting taxes and exchange rates: • Monetary and fiscal policies. the “inner ring” of policies discussed earlier. it has drawn attention to other policies that may affect FDI but that have not been specifically considered in this context in the past. This mutually reinforcing process has in fact shaped international production in recent years and led to its integration at a deeper level than the shallow integration based on arm’slength trade and flows of financial capital (UNCTAD. they directly affect one of the determinants of the investment decision. while the liberalization of FDI frameworks has contributed to an acceleration of FDI flows by creating more “space” for them. and to integrate their production structures on a regional or global basis. In particular.Chapter IV 2. These could be seen as constituting the “outer ring” of policies in the FDI context. in turn. air transportation) and to permit forms of FDI entry previously considered less desirable. The speeding up of liberalization and the simultaneous weakening of its effectiveness as a determinant of FDI has extended the scope of FDI policy frameworks.) Broadly speaking. provided TNCs with an ever-increasing choice of locations and they have become more selective and demanding as regards other host country determinants. progress in the liberalization of trade. M&As and participation in privatization programmes. a process of diminishing returns has set in and liberal FDI policy is increasingly losing its effectiveness as a locational determinant of FDI. telecommunications.

R&D policies). There are also policies determining the functioning of factor markets. the value of transferred profits. The realization that almost all of these policies can affect FDI is relatively recent. It is now widely understood that environmental policies may influence FDI or that policies vis-à-vis small and medium-sized enterprises may facilitate FDI through creating a pool of potential suppliers of competitive intermediate products to foreign affiliates. Thus. one of the consequences of the worldwide trend towards the liberalization of FDI policies has been the realization by countries that. there are policies that affect the supply and quality of productive resources in a host country. a country with lower corporate tax rates should stand a greater chance of attracting an FDI project than a country with higher rates.7 • Macro-organizational policies . the value of these policies as tools to influence locational decisions becomes less pronounced. there are structural policies influencing the industry composition of manufacturing (e. for example. such as labourmarket policies that may have either a discouraging or an encouraging impact on inward FDI. or provided information and services to facilitate technological partnerships between domestic and foreign companies. as their FDI policies proper become similar. including corporate and personal tax rates and thereby influence inward FDI.6 Personal tax rates may affect managers’ choices as regards the location of regional headquarters and may affect the hiring of foreign personnel. deregulation of service industries).g. These affect patterns of resource allocation as well as the structure and organization of economic activities and include the following: • First. They have encouraged links. Such policies can affect not only the quantity of FDI a country receives but also its quality.Tr World Investment Report 1998: Trends and Determinants • Fiscal policies also determine general tax levels. educational and health policies that raise the supply and quality of human capital in a country or policies that promote infrastructure development can improve a country’s locational advantages substantially and give it an edge over others. A case in point is technology policy. and the competitiveness of foreign affiliate exports. This has in 98 . although with different degrees of intensity. Finally. Other things being equal. the spatial composition of economic activities (e.g. In the past. these policies have been oriented more towards building technological capacity.g. Exchange-rate policy is related to stability and may influence FDI decisions by affecting the prices of host country assets. the functional composition of activities (e. Some of these policies have been used in the FDI context for some time. • • To sum up. regional development policies). and the composition of activities by type of ownership and intensity of competition (e. Host countries are instead increasingly evaluated by potential foreign investors on the basis of a broader set of policies within which FDI policies are embedded. developing countries encouraged the transfer of technology through FDI and some also tried to control the outflow of technology payments. policies vis-à-vis sunset and sunrise industries). between foreign investors’ research and domestic industries through the provision of tax credits. Recently.g.

and countries that were invisible or unattractive to investors have all begun to resort to it (UNCTAD. Finally. seen as an enabling act aimed at creating a framework that establishes. B. a new type of resource increasingly sought by TNCs. including in particular the broader corporate strategies of TNCs. Business facilitation From the perspective of foreign business the liberalization of core FDI policies discussed in the preceding section -.is. the reduction of the “hassle costs” of doing business in a host country (e. First. 9 Promotional actions were also taken to shorten the delayed reactions of investors to emerging investment opportunities' or to help investors.consisting of reducing barriers for inward FDI. strengthening standards of treatment for foreign investors and assuring the proper functioning of markets -. countries that wanted to regain investors’ attention. Second. As many developing countries and virtually all economies in transition have faced similar problems. Few of these measures are entirely new. reducing or eliminating corruption and improving administrative efficiency). the chapter takes up business facilitation measures as FDI determinants. p. the need for promotional action arose when countries changed their attitudes and policies towards the role of FDI in their development from negative to positive. in a globalizing world economy. a level-playing field for all investors and thus makes it possible for them to take action. Governments have become increasingly aware that it is one thing to change a policy. it makes greater demands on the effectiveness of FDI-related policies: to be effective. 8 This enabling act is increasingly complemented by proactive measures. and quite another to get the information to FDI decision makers -. aimed at facilitating the business that foreign investors undertake in a host country (table IV. Third.1). above all. by and large. Ireland and Canada. they need to be coherent within a broader set of policies. it leads to the emergence of new policy areas that cut across traditional policies such as those affecting the production and use of created assets. and requires also the long-term improvement of the economic determinants of investment.g. typically executed by investment promotion agencies (IPAs) that were newly established or transformed from earlier screening and monitoring agencies. their liberalization efforts have been increasingly complemented by promotional programmes.let alone convince them to make an investment). especially 99 . Historically. promotional activity has become more important. it leads to the realization that an effective national FDI policy framework requires a thorough understanding of the determinants of TNC decisions regarding foreign investment. 1995a. and most generally. at one point undertook information and advertising campaigns aimed at changing unfavourable perceptions concerning their investment climates (Wells and Wint. and the provision of amenities that contribute to the quality of life of expatriate personnel. Such countries had to deal with an image problem vis-à-vis foreign investors. 1990). who continued to perceive them as places not friendly to FDI. pervasive and sophisticated. the provision of incentives to foreign investors. Before discussing this most important set of determinants. With time. but investors did not respond to the changes or responded more weakly than desired. it vastly expands the number of policies constituting what investors consider a good investment climate. 275). Business facilitation measures include promotion efforts. Countries that have changed their FDI policies.Chapter IV turn several consequences. such measures have proliferated rapidly and become increasingly routine. what is new is that. for example.

at least 95 countries had such programmes in 1997 (annex table A. although typically subject to national laws and regulations.Tr World Investment Report 1998: Trends and Determinants small and medium-sized firms. a guarantee of most-favoured-nation (MFN) treatment. developing or in transition -. although it is often qualified by exceptions applicable in cases of balance-of-payments difficulties. 11 These programmes have become one more tool governments use to attract foreign investors. with a growing number of BITs providing the investor with a choice of mechanisms.3). most BITs do not grant a right of establishment.1). non-discriminatory. in accordance with due process and accompanied by compensation.IV. Intensified competition for FDI has also led to more proactive policies aimed at actually bringing in FDI and servicing it when received. most treaties provide for fair and equitable treatment.e.3. the principle also often being subject to qualifications (to take into account the different characteristics between national and foreign firms) and exceptions (relating mainly to specific industries or economic activities. perhaps. treaties now grant national treatment. as mentioned in the last section. If membership of the World Association of Investment Promotion Agencies (WAIPA) can be taken as a proxy. when there are various agreements applying to the investments covered.12 together with bilateral investment treaties (box IV. namely: • the definition of investment is asset-based. subject to some standardized exceptions. a guarantee of free transfer of payments related to investment is common to virtually all BITs. discover new opportunities that they would not find on their own. the standards for determining the modalities of compensation are often described in different terms that could potentially result in similar outcomes.has increased rapidly. Consequently.such as local content. some BITs include one or several of the following provisions: • • a requirement that the host country ensure investors access to information on national laws. There is a core of provisions that is common to a large number of BITs. investment incentives (box IV. a commitment to permit or facilitate entry and sojourn of foreign personnel in connection with the establishment and operation of an investment. a State-to-State dispute-settlement provision is also virtually universal. a prohibition on imposing performance requirements . Investment-generating measures can consist IV.4). and a guarantee of national and most-favoured-nation treatment on entry and establishment. is found in virtually all BITs. i. the more favourable provision among them applies. it includes tangible and intangible assets and generally applies to existing as well as new investments.3. entry and establishment of investment is encouraged. Source : UNCTAD. the weakening impact of liberalization by itself has induced governments to “want to do more” to influence FDI location decisions. and an investor-to-State dispute-settlement provision has become a standard practice. • • • • • • • • In addition. such as prohibiting arbitrary or discriminatory measures or prescribing a duty to observe commitments concerning investment. coupled with numerous variations in the specific formulations employed. membership in the Multilateral Investment Guarantee Agency and. the number of countries with investment promotion programmes -. export conditions and employment requirements . or to policy measures such as incentives and taxation). most treaties specify that. forthcoming b. virtually all BITs recognize the right of the host country to expropriate subject to the condition that it be for a public purpose. Bilateral investment treaties: similarities and dif ferences An important characteristic of bilateral investment treaties (BITs) is the considerable uniformity in the broad principles underlying the agreements. differences Box IV.be they developed.on the investor as a condition for the entry or operation of an investment. Such actions were also aimed at shortening psychic distances between host and home countries. 10 Finally. • • 100 . often qualified by more specific standards. broad and open-ended so that it can accommodate new forms of foreign investment.

that is the reinvestment of earnings by established foreign affiliates -. Under the pressures of competition for FDI in a globalizing economy. 1991). p. 78 per cent of the IPAs stated that they have tried to develop a process of encouraging foreign investors to reinvest through upstream and downstream linkage activities (UNCTAD. Needless to say.though at the same time difficult and costly -. In developing countries and some developed countries. especially in activities considered particularly desirable from the host country’s point of view (Wells. p. But then it may be that. 30).1) and especially as regards investment incentives is largely similar. 1990. they can help to attract other investors. the weight of these considerations among various factors guiding promotional decisions also increases. However. for example. For example. there seems to be considerable room for improvement in them (Young and Hood. 13 The reasons for the inclusion of these services in investment promotion efforts are twofold. 36). A case study of ten IPAs from developed and developing countries.Chapter IV of direct mail or telephone campaigns or industry-specific investment missions. Investment-facilitation services are another increasingly important component of promotional activities in both developed and developing countries (Young and Hood. if the expansion of a foreign affiliate is not possible for reasons beyond the reach of the host country (because. And a survey conducted by UNCTAD in the mid-1990s among 81 IPAs confirmed that a great majority of them “had a system for identifying and attracting investors”. however. undertaken in the late 1980s. But the most important and promising -. services rendered to established foreign affiliates regarding day-to-day operational matters (Young and Hood. if such a system was computerized. p. that is. were known before. p.single organizations supposed to be able to handle all matters related to FDI projects (Wells and Wint. therefore. IPAs face budgetary constraints which have not yet allowed them to translate this awareness into workable comprehensive programmes. they frequently led to the creation of “one-stop shops” -.can be a significant source of FDI (in the case of United States foreign affiliates it can account for up to a half of the annual outflows of FDI). Most of these. they were introduced to increase the efficiency of FDI liberalization. although after-investment services have become one of the standard functions undertaken by IPAs. Initially. According to the UNCTAD survey. 54). a no less important objective is to retain the existing level of FDI. As FDI stock increases. because bureaucratic barriers facing investors after a project was approved were frequently so high that they discouraged would-be investors. 279). p.activity is targeting firms that are likely to respond to promotion efforts and to invest in a given host country. which aroused investors’ interest but did not necessarily lead to investment. accelerating the various stages of the approval process and providing assistance in obtaining all the needed permits. Such services consist of counselling. incentives have been used to compensate foreign affiliates for additional costs 101 .e. 1994. 1997b. only 28 per cent of IPAs from developing countries and 53 per cent from developed countries answered ”yes”. Secondly. 1993). if not all. corporate strategies have set other priorities). i. 46). indicating that many of these systems may be quite rudimentary (UNCTAD. When asked. 1994. The story as regards other business facilitation measures (table IV. 1997b. p. 15). One is the realization that sequential investment -. Wint. 1993. investmentfacilitation services have been extended to include after-investment services. 1995a. showed clearly the shift of focus of these agencies’ activities from image-building to investment-generation (Wells and Wint. cited above. to prevent divestment (UNCTAD. 1994). although countries are aware of the importance of afterinvestment services. there is a growing awareness that satisfied investors are the best evidence of a good investment climate in a host country and that.

Incentives can also be justified to compensate investors for lost return due to other government interventions (for example. In addition. and they involve financial and administrative costs. It is not in the public interest that the cost of incentives granted exceed the value of the benefits to the public. and such competition can be very costly. closing the market for further entry. those resulting from economies of scale. In sum.. incentives can serve a number of development purposes. government equity participation.g.4. activities or regions. although sometimes only foreign investors can access certain incentives (as when special incentive packages are geared towards large projects or specific foreign investors. as barriers to FDI and trade have declined.4. the general legal regime for FDI.4). provinces and local authorities that offer them has increased considerably since the mid-1980s (UNCTAD. they are not FDI incentives per se.. duty remissions on imports or performance requirements) or for carrying certain public costs where a government lacks the institutional capacity to bear them itself. They do not include broader nondiscriminatory policies. they also have the potential to introduce economic distortions (especially when they are more than marginal) that are analogous to subsidies on trade. Incentives to attract FDI are What ar e incentives? Incentives are any measurable economic advantage afforded to specific enterprises or categories of enterprises by (or at the direction of) a government. or where advanced technologies are involved that can only be provided by foreign investors). preferential government contracts). IV. 102 . many countries are experiencing increasing incentives competition among regional or even local /. government insurance at preferential rates) and market preferences (e. performance requirements are used less frequently. reduction of the standard corporate income-tax rate. protection from import competition. Competition for FDI with incentives Governments use incentives to attract FDI. government grants. The range of incentives and the number of countries. Sometimes. most investment incentives are directed to domestic and foreign investors alike. exemptions from import duties). The main types of incentives used are fiscal incentives (e. investment and reinvestment allowances.Tr World Investment Report 1998: Trends and Determinants related to performance requirements imposed by host country governments. 1995a. or to reduce (or redistribute) its costs or risks. and box IV. when technologyintensive investment is being sought. accelerated depreciation. subsidized credits. granting of monopoly rights. countries even engage in direct competition for specific investment projects with financial and other incentives. They include measures either to increase the rate of return of a particular FDI undertaking. because they are increasingly considered an unnecessary hassle which might discourage foreign investors. or to influence the character of an investment. free repatriation of profits or the granting of national treatment. to steer investment into favoured industries. The range of incentives available to foreign investors and the number of countries that offer incentives have both increased considerably since the mid-1980s.the classic infant-industry argument used in a very different context. Incentives can thus be justified to cover the wedge between the private and the social returns on an investment. In a global economy.for example. for example. p. However. financial incentives (e. In a more dynamic context of growth and development. the creation of widely diffused knowledge and the upgrading of skills of mobile workers. Box IV. tax holidays. incentives can be justified to correct the failure of markets to reflect the gains that can accrue over time from declining unit costs and learning by doing -.g. in order to encourage them to behave in a certain manner.14 But the use of investment incentives has proliferated. While these policies certainly bear on the location decisions of TNCs. the general regulatory and fiscal regime for business operations. as.g. Economic rationale for incentives The economic rationale behind incentives is to correct the failure of markets to reflect the wider benefits arising from externalities in production -. Other types of incentives frequently used include preferential treatment on foreign exchange and subsidized dedicated infrastructure and services. Today. relating to the availability of physical and business infrastructures. 290.

computer. while incentives do not rank high among the main FDI determinants. 1973) found that export-oriented investors seeking inexpensive labour valued fiscal incentives more highly than market protection or other incentives. Foreign investors may respond differently to different types of incentives depending on their strategies. The effects can be both distorting and inequitable since the costs are ultimately borne by the public and hence represent transfers from the local community to the ultimate owners of the foreign investment. 1992) concluded that fiscal incentives and financial aid did not influence location. food processing and petrochemicals . the conclusions have tended to support the research undertaken in past decades. there will be a tendency to overbid. Market-seeking investors. Source : UNCTAD. forthcoming and Phelps. Competition for FDI with incentives is pervasive not only among national governments but also among sub-national authorities. An increasing number of countries target investment activity in industries involving technology and high value-added (such as electronics. and 1992). such as market size and growth. this pattern is reversed in developing countries. 1996a. thus further multiplying the number of incentive programmes available to foreign investors.e. e. to set up regional headquarters). they are ultimately successful only to the extent that they succeed in attracting investment to a country away from another. 103 . especially for projects that are cost-oriented and mobile. incentives are becoming increasingly focused and targeted and are sometimes contingent upon certain conditions being met by the investor. Mytelka. e. production costs and markets (Guisinger. while the establishment of enterprise zones and research parks did. In fact. if it were otherwise. it is difficult to discern clear patterns across countries and regions on the type of industries or activities favoured by incentive programmes.4.many companies reported that incentives were frequently not even considered and simply made an already attractive country more attractive.4. the poorer countries are relatively disadvantaged. adequate infrastructure. economic stability and the quality of the general regulatory framework. For example. a recent study (Vallanchain and Satterthwaite.g. mining and oil exploration. When governments compete to attract FDI. production costs. financial incentives. and the investment were to take place anyway. or North of England and North of France (Bridge. governments have also intervened through the creation of markets (with defence expenditures and government purchasing) and research funding. a member country of the European Union or a country with a large national market. the incentive would be superfluous. developed countries make more use of financial incentives than of fiscal ones. 1983. countries often offer a broad array of options linked to different objectives. et al. Also. there is considerable evidence to suggest that incentives are a relatively minor factor in the locational decisions of TNCs relative to other locational advantages.Chapter IV IV. although market reforms and the introduction of competition policy in an increasing number of countries are narrowing the scope for these incentives. However. particularly grants. 1998. In an open world economy. Ireland and Scotland. While manufacturing industries are still the main focus of incentive programmes. computer software) and in infrastructure projects. However.automobile. there is increasing evidence that when the location is broadly determined. Investment decisions were made mainly on the basis of economic and long-term strategic considerations concerning inputs. a wide variety of incentives are being offered for foreign investors to transfer advanced technologies and attract R&D facilities (including tax reductions. seem to have a greater impact on investors’ decisions than fiscal incentives. Dunning. then incentives can play a decisive role in choosing. In such competition for FDI. Market incentives have played an important role until recently. their impact on locational choices can be perceptible at the margin. Some countries are also offering incentives to encourage companies to locate specific corporate functions within their territories (say. 1998). (Box IV. In the case of regional incentives. A number of studies that have analyzed incentive preferences by type of investor (Reuber et al. Whatever the rationale for FDI incentives. some governments continue to offer incentives in agriculture. However. on the other hand. presumably because these countries lack the resources needed to provide financial incentives. 1989. i. as regards individual investment projects. skill levels. effect The effect of incentives on investment decisions In spite of this competition. fisheries. subsidized infrastructure and land and industrial parks). between Scotland and Wales. 1998c. many countries have increased their incentives with the intention of diverting investment away from competing host countries. In recent years. concluded) authorities to attract FDI. in which barriers to FDI are falling. bidders may offer more than the wedge between public and private returns. In brief.. Although there has been considerable recent research on the effects of incentives on overall FDI flows. in a survey of 30 TNCs covering 74 investment projects in four industries -. As a general rule. value market protection more than fiscal incentives. partly because fiscal incentives are less flexible and their adoption involves more difficult parliamentary procedures. However.g. robotics.

If one country in a region or one locality in a country offers incentives and another does not. p. and the widespread use of English (UNCTAD. 1993. particularly focusing on the electronics sector of the United States (UNCTAD. overall. such as those of Ireland and Costa Rica (which recently succeeded in attracting a $500 million FDI project by Intel). One frequently cited case of successful investment-generating activities relates to United States FDI in the Malaysian electronics industry. which are driving forces in any competition and increasingly lead to benchmarking.17 Highly publicized cases of successful investment promotion activities underline this very clearly. they are not an important element in the set of factors that determine inward FDI. there is much evidence that. But again. 1995a. but this role was possible because of economic determinants that were continuously upgraded by government policies in such areas as education. Malaysia followed the earlier example of Singapore. not only in the area of FDI liberalization but also in the area of business facilitation. If a host country does not have some basic economic determinants (discussed in the next section) in place. Once. a stable and open economy. they try to distinguish themselves from their competitors by doing more and leaving them behind. 276-277). it has to be kept in mind that they can only play a supporting role and will rarely be decisive factors. As regards incentives alone. 74). 104 . p. the upgrading of a country’s human resources or the strengthening of its physical infrastructure -. 1994a. these factors were wellgrounded in a broader effort aimed at establishing a favourable investment environment and covering in a comprehensive manner all areas of importance to investors (Jegathesan. 1994a. Moreover. The result is a certain trend towards a convergence of policies and practices. this success was possible because of the presence of broader economic and other factors such as the availability of productive human resources at competitive costs.Tr World Investment Report 1998: Trends and Determinants The proliferation of similar policies and practices is driven by demonstration effects. this was possible because Singapore could capitalize on its economic determinants which were being continuously upgraded. which was generated through investor targeting by Malaysia’s Industrial Development Authority (MIDA) including specific investment missions to capital-exporting countries. then. infrastructure or the nurturing of small potential suppliers to foreign affiliates. p. which had identified Apple Computers as a potential investor and persuaded it to invest there even before the company had invested elsewhere abroad (Wells.16 Such measures are thus quite different from actions aimed at ensuring political and economic stability. however. Examples from other parts of the world. incentives may have an impact on influencing the precise choice of location within the region or country.15 Even better. pp. especially in a regional context: IPAs look at what their competitors are doing and try to catch up. Convergence is taking place as regards instruments which are inexpensive and easy to use as well as promotional measures that are expected to have an immediate effect on a country’s investment climate. a decision has been made to undertake FDI in a given region or a given country.all of which take time (UNCTAD.5). or if other components of the investment climate are unsatisfactory. 1998). show a similar pattern: promotional efforts played a certain role (box IV. 51). well-developed transportation and communication infrastructure. no promotional efforts or incentives will help it to attract significant FDI. While this is a good example of successful investment generation by an IPA. 311). the establishment of a sound macroeconomic framework. With respect to the effectiveness of business facilitation measures (and especially of promotional measures and incentives) as FDI determinants.

p. Ireland’s FDI policy Foreign ownership of firms operating in Ireland was not allowed between the early 1930s and the late 1950s with the exception of firms established before 1932. for example. The overall result is a “…quite phenomenal growth of export-oriented FDI in manufacturing. 1998. In the course of the 1950s. 1998. In 1997. 1798). Ireland has become one of the largest exporters of software. 1996. The objective of this policy. Price Waterhouse. creating specialized industrial clusters in designated locations. p. generated over one-third of export revenues in 1997. as the qualifications of the labour force were not a major initial attraction.5. Finally. grants for financing new machinery and equipment.18). the IDA introduced the concept of special industrial zones to generate “clusters of new activity” (Tillett. The strategy had three core elements: • • • selecting leading. Tillett. computer software. it has persistently upgraded education.100 to 1. and Jegathesan. this industry.” (Barry and Bradley. some 1. There IV. led by about 200 foreign-owned companies. through marketing and R&D (Ruane and Görg. with the abolition of the Control of Manufactures Act and the establishment of the Shannon Free Airport Development Company in 1959. Fiscal incentives have included fixed-asset grants designed to reduce the cost of building or refurbishing factory premises. other software companies also established affiliates in the vicinity (Tillett. from a zero base in the late 1950s to a situation where almost 60 per cent of gross output and 45 per cent of employment in manufacturing is in foreign-owned export-oriented firms. was to reserve the gains from infant-industry protection for locally owned firms. In the 1980s. Ireland made a concerted effort to increase the level of education. laid down in the Control of Manufactures Act. 1996). Neither are they necessary.200 foreign firms were active in Ireland. p. 7). The inflow of FDI into the country since the 1950s has served to create new comparative advantages in industries such as chemicals. 1989. The electronics industry has emerged as the second largest industry in Ireland. 1996). Ireland’s Box IV.31. To encourage FDI to tap these sites. IDA approaches “flagship investors” with the aim of using these leading firms to pull in other firms from the same industry. To conclude. 299. and promoting links to domestic firms.000 persons. business facilitation measures are not sufficient for FDI to take place. The Industrial Development Agency (IDA) of Ireland took a central role in coordinating efforts involving both national and local authorities and developing a range of incentives and promotional efforts to approach potential foreign investors systematically (IDA. incentives can influence locational decisions between these countries and localities. medical instruments. 1996). one should not overestimate the importance of business facilitation-related FDI determinants. financial services. p. tilting the balance in favour of the incentives provider (UNCTAD. When Ireland joined the European Economic Community in 1973. Source: UNCTAD. 1997). 105 . With respect to regional development policy. which had barely existed before the Second World War. office machinery and electrical engineering. so that some 40 per cent of school-leavers are now engaged in tertiary education (Ruane and Görg. and grants for establishing R&D facilities (up to 50 per cent of the costs of fixed assets and a share of other expenses of such facilities). for the country as a whole.5. the government offers employment and training grants. 1997). 1995a. and international services.Chapter IV other things being equal. At the firm level. p. Applied alone. For example. 1997. namely electronics. grants favouring exporters had to be extended to all newly established firms (Ruane and Görg. industrial policy began to reverse. 1997. Tillett. investment promotion strategies became more focused on certain attractive sectors. after Lotus set up software operations in Ireland. as is an enabling policy framework for FDI. produced by 600 companies employing some 19. based on information received from the Industrial Development Agency of Ireland. high value-added industries. The pattern of inward investment in Ireland has been visibly influenced by this policy.

focussing on the principal ones. even if this category of determinants is not equal in importance to the other two categories. especially since the 1960s and 1970s. In the nineteenth century “much of the FDI by European. resour esources Natural resources Historically. 57). Comparative advantage in natural resources usually gave rise to trade rather than to FDI. In addition. Traditional economic determinants a.especially in little-known investment locations or in countries implementing reforms and improving their FDI policies or with concrete individual investment projects. the United Kingdom and the United States was below 5 per cent and. the share of this sector in the total outflows of Germany. FDI/TNC database). the share of the primary sector in their outward stock of FDI decreased from almost 25 per cent in 1970 to 11 per cent in 1990 (UNCTAD.). about 60 per cent of the world stock of FDI was in natural resources (ibid. The underlying assumption is that an enabling framework for FDI is in place unless otherwise specified. and analyses how they have changed over time. p. market-seeking and efficiency-seeking (table IV. additional factors that facilitate FDI flows are also noted. Wherever relevant. Economic determinants The economic determinants of inward FDI can be grouped for analytical convenience into three clusters. Up to the eve of the Second World War. Traditional 1. because business facilitation measures can indeed make a difference -. these determinants have changed in response to the forces of liberalization and globalization. 1993a. France alone had a share as high as 9 per cent (UNCTAD. the presence of natural resources by itself was not sufficient for FDI to take place. 106 . among major investors. As with the evolution of FDI regulations. primary products for the (then) investing industrializing nations of Europe and North America” (Dunning. neither should it be underestimated. After the War. infrastructure facilities for getting the raw materials out of the host country and to its final destination had to be in place or needed to be created. 1993a. Even when it was prominent as an FDI determinant. while the convergence of investment regimes and business facilitation practices reduces the relative effectiveness of these determinants.Tr World Investment Report 1998: Trends and Determinants are enough examples of considerable investment inflows into countries that used neither promotional techniques nor incentives (Brazil in the 1970s and 1990s and Indonesia in the 1980s). This section reviews the economic determinants of inward FDI. United States and Japanese firms was prompted by the need to secure an economic and reliable source of minerals. each of them reflecting the principal motivations of TNCs for investing in foreign countries: resource-seeking. the relative importance of natural resources as a host country FDI determinant has declined. During the first half of the 1990s (19911995). 62). Japan. C. In the case of major home countries. the most important host country determinant of FDI has been the availability of natural resources. Above all. notable differences in this respect may assume greater significance when it comes to locational choices. p. Investment took place when resource-abundant countries either lacked the large amounts of capital typically required for resource extraction or did not have the technical skills needed to extract or sell raw materials to the rest of the world. But.1).

Australia) and countries in transition (Azerbaijan. with sufficient capital and technical skills to permit governments to rely on them for the production and distribution of raw or processed products. developed (e. the availability of natural resources is still a determinant of FDI and continues to offer important possibilities for inward investment in resource-rich countries.g. p. FDI gave way to joint ventures with TNCs. 1996a. But the size of this investment was small 107 . Natural resources still explain much of the inward FDI in a number of countries. this should have made market size and growth strong host country determinants for FDI in the services sector. and market growth (table IV. This meant that. Traditionally. FDI was no longer necessary and host countries could revert to trade based on comparative advantage. usually state-owned. and can help firms producing tradable products to achieve scale and scope economies. in the wave of United States investments in Europe. 258). including TNCs. in a number of cases. countries in sub-Saharan Africa).g. Large markets can accommodate more firms both domestic and foreign (especially important for nontradable services). a reconfiguration of conditions at both firm and country levels reflecting the changing relationship between developing host countries and natural-resource-seeking TNCs also played a role. From a host country’s perspective. the relevant economic determinants for attracting market-seeking FDI include market size. while inward stock in developing countries increased more than sixfold (UNCTAD. but the fact that most services were not tradable and therefore the only way to deliver them to foreign markets was through establishment abroad. This reconfiguration was characterized by the emergence of large indigenous enterprises in many developing countries. p. This motive was paramount.5). In fact. to grow and/or to stay competitive by gaining access to new markets at home and abroad and/or increasing existing market shares. in absolute terms as well as in relation to the size and income of its population.Chapter IV While the decline in the importance of natural resources as an FDI determinant can be attributed to a decline in the importance of the primary sector in world output. the inward FDI stock in the primary sector of developed countries increased more than fivefold during 1975-1990. following voluntary export restrictions and the possibility of further protectionist measures in the automobile industry. Market access became the predominant motive for investing in the manufacturing sector of developed countries between the two world wars and of developing countries in the 1960s and 1970s. developing (e. 1998a. especially in the United Kingdom. or non-equity arrangements. Theoretically. although the principal reason was not the existence of tariffs. In other cases.1 and the annex to this chapter). market size and growth as FDI determinants related to national markets for manufacturing products sheltered from international competition by high tariffs or quotas that triggered “tariff-jumping” FDI. during the heyday of import-substitution industrialization. As growth is a magnet for firms. National markets were also important for many service TNCs. and in Japanese investments in the United States after the mid1980s. National markets An important group of traditional economic determinants of inward FDI corresponds to the need of firms. Though declining in relative importance. Kazakhstan and Russian Federation). This does not mean that FDI in natural resources has declined in absolute terms. b. a high growth rate in a host country tends to stimulate investment by both domestic and foreign producers. during the early post-war period (Dunning. for example.

Infrastructural services. This type of FDI began to emerge in the 1960s. Technology and a capacity for continuous innovation are the key created assets. alone or in combination with one another -. telecommunication). for example. mostly because of restrictive FDI frameworks in both developed and developing countries. technological improvements in transportation and telecommunication technologies have also provided TNCs with the ability to coordinate and manage their assets across borders and to service markets anywhere in the world. has been the most prominent among them. or the labour is made inaccessible by distance or poor infrastructure.Tr World Investment Report 1998: Trends and Determinants compared to the size of the services sector. Traditional inward FDI determinants and the types of FDI associated with them have not disappeared in a globalizing economy but their importance is declining. regional and international markets. i. turning it into one of their ownership-specific advantages.g. As most of the technological improvements were carried out by firms. FDI and technology flows. the result was a pool of companies with enhanced ownership-specific advantages that put them in a better position to become TNCs. Availability in this sense implies not only abundance but low costs relative to productivity. In addition. They have thereby also redefined the determinants of inward FDI. and the resulting competitive pressures (UNCTAD 1996a. in many cases opening them up to FDI. c. but it began to flourish only under conditions of globalization and will therefore be discussed in the next section. to assets that can provide a competitive edge. is intensive in the use of unskilled labour. The availability of low-cost unskilled labour. in a number of industries.e. This in turn underlines the importance of access to created assets. pp.improvements in technology. Improvements in technology have contributed to the deregulation of a number of important service industries (e. 95-97) -have led to a reconfiguration of the ways in which TNCs pursue their resource-seeking. Other traditional determinants Apart from natural resources and national markets. FDI and technology flows has created enlarged markets for final and intermediate goods and services. Technology has become one of the most important tools for competition. indeed. 2. were typically publicly owned monopolies and foreign ownership in financial services such as banking and insurance was either not permitted or restricted. technological improvements in products including services and processes like marketing have become the key to competitiveness. A low price is a natural consequence of abundance. but also 108 . The opening of markets to trade. and has provided TNCs (and domestic firms) with better access not only to national. geographically separable from other stages. TNCs have now enhanced their internal capacity to manage global complexity. market-seeking and efficiency-seeking objectives. This is so especially for TNCs seeking greater efficiency in producing labourintensive final products or for TNCs producing final products for which some stage of production. markets more open to trade. there are also other locationspecific economic determinants of FDI reflecting other types of TNC motivations. The impact of globalization The principal forces that have driven the globalization process. Combined with their general management expertise. unless it is offset by host governments’ interventions to raise the price through minimum wage laws or high social insurance taxes. largely immobile.

Other 109 . also in other sectors. simple and complex. spread across the globe. subcontracting). Only under conditions of globalization did TNC strategies give rise to vertically integrated TNC structures. established in countries that offer the locational advantages required by these processes.000 in 1968/1969 to about 34.g. They are used by TNCs facing competitive pressures and aim at reducing the production costs of labourintensive products or processes in the value-added chain (UNCTAD.Chapter IV to markets for factors of production and other resources. and improved the efficiency of their international production systems.1) are involved in different ways in these strategies: Resources. the reliability of its supply and the level of its skills. 1993a). The total number of TNCs stood at an estimated 52. compared to 2 per cent in the late 1970s. a. They entail the transfer of these products or processes to foreign affiliates.and their most efficient organization -. The principal locational advantage needed to attract FDI guided by this strategy is unskilled labour. from both developed and developing countries. licensing. to integrate international production. relatively independent from parent companies and without links to other affiliates of the same parent firm.have responded by undertaking FDI so as to acquire new locational assets.000 in 1991 to around 9. firms have sought new opportunities to improve their growth and competitive positions. Vertically integrated structures were limited to natural-resource TNCs.000 by the mid-1990s. Existing TNCs have responded by making the acquisition of locational assets -. Enterprises that are not TNCs -. With technological improvements enhancing the ability of firms to expand production and the opening of markets creating space for such an expansion. The number of TNCs from developing countries grew from around 4.000 by the mid-1990s. This is reflected in the growing number of TNCs. many of them obviously small and medium-sized enterprises. This has enlarged the range of choices that TNCs have regarding the modalities of serving these markets (especially FDI. controlled through equity or non-equity arrangements (e. What follows is a discussion of these strategies and their implications for host country determinants of FDI.and no longer as protected by national protectionist regimes as in the past -. Thus they were mostly horizontally organized enterprises with plants in a number of countries. Simple integration strategies have been the first step in this direction. The number of TNCs in 14 OECD countries rose from about 7. subcontracting. franchising).000 by the mid-1990s.g. trade.an important part of their competitiveness-enhancing strategies. they typically had to offer more by way of the quality and quantity of this resource to prevail in competition with other countries. In the management of locational assets firms can pursue a variety of strategies. Simple integration strategies In a world with trade barriers. The three clusters of locational economic determinants (table IV. marketing expertise embodied in enterprises). e. TNCs pursued differentiated strategies based on stand-alone foreign affiliates. they accounted for 14 per cent of world FDI outflows. But as countries with abundant unskilled labour interested in attracting this type of FDI have never been in short supply. low-cost skilled labour. limits on the movement of factors of production and overwhelmingly non-tradable services. By 1997. large and small. increased their access to immobile resources (unskilled labour.

in economies in transition. by sudden shifts in fashion. the cost and productivity of labour as well as the cost of physical infrastructure are the most important determinants of FDI.21 • 110 . they offer locational advantages that go beyond low-cost labour. this gives it an important locational advantage. educated and trained labour has become an important resource.20 In addition. toys. costs and time needed to transport goods over long distances were reduced. They began to emerge on a visible scale when the first export processing zones were established in the late 1960s and 1970s. foreign affiliates established within the framework of this strategy are located in developing countries and. and sports equipment) as well as towards the labour-intensive aspects/components of otherwise capital-intensive industries (e. driven by price-based competition. stricter labour laws or changes in quotas that affect access to final markets). is particularly important. shoes. At the same time. Efficiency. If a host country enjoys privileged access to large developed country markets. They were typically geared towards labour-intensive industries. the increasingly sought-after advantages are competitive combinations of wages. Though the principal resource sought is labour. in most cases it also loses foreign affiliates relying on such access. it only began to prosper when barriers to trade and FDI were lowered. skills and productivity. Typically. in response to wage increases. And if a host country loses access to international markets. In addition to physical infrastructure and the availability of inputs like energy and water. which it is not. the importance of FDI policy and especially business facilitation including incentives has increased greatly. This sort of investment has always been mobile (for example.18 Markets. the nature of locational advantages related to this type of investment has also changed: • As more countries compete for this type of investment.19 Access to international markets. (e. most of this type of investment would be concentrated in countries with abundant unskilled labour. Simple integration strategies are not new. for example. The market of a host country is not the primary consideration here. While low-cost labour remains a locational advantage. more recently. or at least to markets of developed countries. It is the loss of this advantage (in most cases due to wages rising in excess of productivity) that may lead to the relocation of a foreign affiliate to other countries offering more competitive conditions. If this access is limited by tariff or non-tariff barriers. in practice. it is always labour plus other advantages: if labour alone were sufficient to attract FDI. Although this type of strategy and associated FDI has limits determined by the declining share of labour costs in the total costs of manufacturing and of tradable services. As cost reduction is the principal driver of this type of strategy. textiles and clothing.g. the advantage is correspondingly limited. semiconductors in the electronics industry and electrical wiring in the automobile industry). because the competition among countries for this type of investment is most intense.g. and communication technology permitted not only the overall coordination and management of affiliates located even in different continents. but also the immediate adjustment of design or product specifications in response to demand changes caused.Tr World Investment Report 1998: Trends and Determinants resources include the availability and quality of physical infrastructure for exporting the final output produced by such labour.

firms increasingly seek locations where they can combine their own mobile assets most efficiently with the immobile resources they need to produce goods and services for the markets they want to serve. which in turn draw on a wider range of other locational advantages of host countries. have to be harmful to a host country.are able to attract FDI in industries in which it did not exist before. higher-quality and less mobile FDI. Such a loss does not. that is. with each of them carried out by affiliates in locations best suited to the particular activity. training. parts production. firms are increasingly pushed beyond simple integration strategies. firms split up the production process into various specific activities (such as finance. Examples are NAFTA. distribution). in which the lower grade of FDI is replaced by a new. as well as foreign affiliates that capitalize on their experience through indirect FDI and have moved up-market towards designing and organizing and controlling networks of suppliers of various labour-intensive goods spread over several countries. Services that have become tradable include such simple labour-intensive activities as data entry and such skill-intensive ones as the production and servicing of software programmes. 1995a. As a consequence. p. towards complex integration23 that permit them to benefit to the highest extent possible from the international portfolio of their locational assets. market access has led to increased FDI flows into labour-intensive industries.Chapter IV but this mobility has now increased dramatically and so has the risk of losing the locational advantage for this sort of FDI. their ability to survive and grow while attaining their ultimate objective of maximizing profits (UNCTAD. the Lomé Convention and the association agreements of the European Union. and the acquisition of new skills and capabilities. Technological improvements in the area of telecommunications and computers make it possible to extend these strategies to information-based services by increasing their tradability. This process creates an international intra- 111 . complex integration strategies. Complex integration strategies The forces of globalization have heightened the preoccupation of firms with their competitiveness.22 TNCs undertaking this type of FDI also include firms from developing countries.especially a computer-literate labour force and a reliable and competitive telecommunication infrastructure -. R&D. this has not always been the case and has usually occurred only if other economic determinants were favourable. it may signal an economic restructuring process involving increasing labour productivity. While. in a number of these schemes. and act as intermediaries between these suppliers and client firms in developed countries. 1995a. The discussion so far has focused on locational advantages related to efficiency-driven strategies in labour-intensive manufacturing processes. b. • Some host countries with an abundant supply of low-wage unskilled and skilled labour have been able to consolidate these advantages by gaining durable or even permanent access to large markets of developed countries through regional integration schemes. however. 126). These improvements have permitted TNCs to pursue more sophisticated competitiveness-enhancing strategies. namely. In pursuing this objective in a liberalizing and globalizing world economy. or segments of these activities. the Caribbean Basin Initiative. In other words. Host countries that have been able to develop locational advantages in this respect -. chapter V). This has indeed happened in labour-intensive industries in the newly industrializing economies of Asia (UNCTAD. accounting.

Furthermore. Liberalization creates the opportunities for such networks to emerge.remains the principal determinant for natural-resource-seeking FDI.typically for export to the world market -.markets.24 For competitiveness-enhancing investments. Similarly. as the boundaries between types of FDI disappear. conditions for efficient operations. high-quality resources/assets. resources and efficiency -. and competition forces firms to take advantage of these opportunities to integrate their locational assets. Complex integration strategies thus combine the pursuit of the three factors motivating FDI -. For such investments. the traditional determinants continue to be influential (box IV. in spite of a shift in the relative importance of different economic determinants and the need for combining them effectively. the Convention on the 112 . Rather. they blur the lines between the traditional clusters of economic determinants. countries that offer an adequate combination of the principal locational determinants that are important for global corporate competitiveness. the host country’s membership in MIGA. state-of-the-art enabling framework is taken for granted as far as FDI policies per se are concerned. The implication is that TNCs pursuing integrated international production strategies will avoid locating activities in countries in which they fear a possible loss of freedom to operate internationally.3). double taxation treaties (chapter III. and access to markets can attract TNCs that pursue integrated international production strategies. preference would be given to locations that are open and well connected to the global economy. For example. the availability of natural resources -. technological progress (especially in information and communication technology) makes it possible for such networks to be operated efficiently on an international basis. But there is also a growing range of goods and (tradable) services for which FDI is seen as a means of increasing competitiveness. and coherent policies that recognize the importance of strong complementarities between trade and FDI. namely.which used to be distinct and distinguishable into a single motive: enhancing competitiveness. Also taken for granted is that the national policy framework is complemented by BITs (box IV. Instead.Tr World Investment Report 1998: Trends and Determinants firm division of labour and a growing integration of international production networks. It is for projects in this range that countries compete in the world FDI market. and characterized by stability. and the applicability of relevant international treaties such as the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. decisions as to where to locate are based on the best possible combination of the principal locational determinants in the light of their expected contribution to the competitiveness of the corporate system as a whole.B). there is a growing expectation by firms that the inner ring of policies directly related to FDI will be expanded. transparency. What does this mean for the economic determinants of FDI? Satisfying or possessing at least one of the principal determinants may no longer be sufficient for a host country to be successful in the highly competitive world market for FDI. The precise interaction of the principal locational determinants for competitivenessenhancing FDI varies across goods and services. a stable. access to local markets remains key for non-tradable services that must be produced when and where they are consumed. predictability. Complex integration strategies therefore make it increasingly difficult to point to a single locational determinant. And. because these projects are flexible as far as locations are concerned.6). Furthermore.

The implications of this for locational determinants go well beyond merely increasing the number of corporate functions that countries may try to attract. 107 . These continue to generate import-substituting FDI and discourage efficiencyseeking FDI. 113 . As regards trade barriers. In non-tradable services. has been able to create the conditions and resources. 1996a. these new types of resources can be created by host countries and influenced by governments. they are “created assets. as well as goods that are perishable or need to be adapted to consumer preferences or local standards. again using United States data for foreign affiliates in manufacturing. the market of the European Union during most of its existence has been smaller than the United States market. Various business facilitation measures. which could do nothing to attract copper-seeking FDI. Box IV. the market of the African continent (without South Africa) is smaller than that of the Republic of Korea. remain as strong as ever. For example. including trading affiliates.g. Source: UNCTAD. the relative importance of different locational determinants for competitiveness-enhancing FDI is shifting. while not decisive. although FDI remains strongly driven by its traditional determinants.7). though it is still true that these affiliates are predominantly oriented towards domestic markets: their domestic sales have dropped from 64 per cent in 1982 to 60 per cent in 1993.6. The continuing relevance of traditional determinants Although the most profound shifts among FDI determinants result from integrated international strategies. as the evolving policy framework there is more indicative of the FDI policy framework emerging globally: sales to local markets in that region declined from 76 per cent to 64 per cent between 1966 and 1993.Chapter IV Settlement of Disputes between States and Nationals. there has been an explosion of FDI in the services sector as a result of the general trend towards the liberalization of FDI frameworks for services. the traditional economic determinants related to large markets. 106). the market-seeking motivation. pp. When firms undertake competitiveness-enhancing FDI. and the corresponding locational attractiveness of host countries. The result is that countries that do not possess natural resources can still attract FDI by creating assets that are in demand by TNCs. Data on the distribution of sales of foreign affiliates of United States TNCs in host countries are indicative in this regard: two-thirds of TNC activity is still of this type (UNCTAD. Costa Rica. These resources. especially complex strategies. are typically people-made. 106). But the key is the shift of importance among the economic determinants of FDI location. are also expected. For example. Perhaps more telling are data for United States foreign affiliates in the European Union. including skilled labour. 1996a. as distinct from natural resources. trade barriers and non-tradable services are still at work. 1996a.108).) Some of the largest national markets remain unmatched in size by the largest regional markets or even by entire continents. but also access to technology and innovatory capacity. In fact. and account for a large share of worldwide FDI flows. while exports increased from 24 per cent to 36 per cent (UNCTAD. Still. they seek not only cost reductions and bigger market shares. p. computer and data-processing services) in which domestic sales declined from 85 to 81 per cent over the same period (UNCTAD. even though the general trend has been towards the reduction or even abolition of tariffs and quotas. p. For example. (These figures are higher in the services sector. A similar trend can be observed in tradable services (e. and the TRIMs and TRIPS Agreements. and the combined markets of the 14 Central and Eastern European countries are smaller than the market of Brazil. Compared to natural resources.” Possessing such assets is central for firms’ competitiveness in a globalizing economy (box IV. needed to attract a $500 million investment project by IV. and lower in manufacturing but they do not change the overall outcome. they continue to remain in force in several (especially developing) countries and in some industries in a much wider group of countries.6.

TNCs assign a particularly important role to obtaining access to created (or strategic) assets: the principal wealth-creating assets and a key source of competitiveness for firms (Dunning. the rest relates to the contributions of various created assets. Moreover. Once present. R&D consortia and service-support centres are characterized by a strong involvement of TNCs. and Stewart. These assets can be embodied in both individuals and firms and they can sometimes be enhanced by clusters of firms and economic activities. Source : UNCTAD. to organize income-generating assets productively). 1993a. firms have to be present in locations where such clusters exist. TNCs not only benefit from them but may also contribute to their further development. p. but they have a common denominator: knowledge. 58). relationships (such as interpersonal relationships forged by individuals or contacts with governments). Mytelka. attitudes to wealth creation and business culture). consists of the costs of such created assets as R&D. The reason for this is that new clusters are often geared more towards external economies that help to upgrade the competitive advantage of the participating firms. Less than 10 per cent of the production cost of automobiles now consists of labour costs. attitudes (e. Apart from created assets. often as flagship firms (Dunning. especially for foreign IV. The importance of created intangible assets in production and other economic activities has increased considerably. 1998a. innovatory. The result is that TNCs have taken advantage of these opportunities and used FDI as a major means of acquiring created assets and enhancing corporate competitiveness. this type of project is unlikely to be relocated with as much ease as projects relying on a single type of easily available resource like low-cost unskilled labour. markets for knowledge-based resources and assets are becoming more open and enterprises embodying these assets can be bought and sold. 47.Tr World Investment Report 1998: Trends and Determinants the INTEL Corporation. They include skills. design. were largely national. ranging from simple products such as cereals through books and computers to automobiles. the new clusters such as science and technology parks. as in the case of the Swiss watch industry.g. A large proportion of the costs of many final goods and services. interactive learning and face-to-face discussions. To benefit from these externalities. Created assets In their quest for competitiveness. p. international competition increasingly takes place through new products and processes and these are often knowledge-based. 1998c. At the same time. Infrastructure facilities. Moreover. competencies (e. trade marks. goodwill and brainpower. such as knowledge creation and the exchange of uncodifiable knowledge. While older clusters. The list of intangible assets is long. or intangible. • 114 .7. Box IV. pp. managerial and learning capabilities). capabilities (technological. Created assets can be tangible like the stock of financial and physical assets such as the communication infrastructure or marketing networks. 60-61. R&D activities leading to new products and processes are costly and risky. 1987. distribution and legal work. An indispensable condition for complex integration strategies is the ability to link specialized affiliates in mutually supporting networks of activities through adequate infrastructure facilities.g. TNCs seeking created assets in knowledge-intensive industries may gravitate to spatial clusters of related activities or specialized support services within a country or a region. advertising. Such facilities include high-quality telecommunication links and reliable transportation systems. as well as the stock of information. 1997). other host country determinants relevant for competitiveness-enhancing FDI are: • Agglomeration economies.7.

It includes not only inputs like natural resources. • • • While many of the principal locational requirements needed to attract competitivenessenhancing FDI can be found in developed countries. such specialized resources have to be of high quality (e. legal services. because complex integration strategies make it possible to match specific locational advantage with the needs of a single functional activity that requires specific types of skills. however. • A broad range of resources. a municipality. Competitive pricing of resources and infrastructure. products that are not globally standardized and require local customization.Chapter IV affiliates that are part of “just-in-time” production systems and for regional headquarters. Large markets are important for complex integration strategies based on scale and scope economies. as long as they are embedded in the appropriate national policy framework. Markets. Locations that seek to attract a wide range of valueadded TNC activities need to be able to provide a correspondingly wide range of resources. they also exist in developing countries and in economies in transition. Although successive rounds of multilateral trade liberalization have decreased the relevance of market access through FDI for many products. Countries that cannot provide a broad range of resources may still be able to attract specialized FDI. natural resources) or one type of process (e.and preferably unique -. and finance and R&D capabilities. however. it can also be a subregion. a workforce with technological sophistication and adaptability). in two ways: • Locational advantages do not necessarily arise spontaneously -.g.g. The challenge is precisely to develop a well-calibrated -. products in which competitiveness demands a quick response to changing consumer preferences. Complex integration strategies are thus an extension of earlier strategies that were limited to one type of resource (e. that it is not an entire country that needs to meet these requirements.they may need to be created and nurtured. policies aimed at strengthening innovation systems 115 . perishable goods. it continues to be important for non-tradable services. In particular. As potentially all parts of the production process and activities of a firm can be assigned to specialized foreign affiliates.g. National policies have an important role to play in this respect. labour-intensive processes): the entire value-added chain is now subject to cross-border vertical integration. and products requiring extensive after-sales service. It is important to emphasize. purchasing and marketing. low-cost labour and engineering skills. a valley or a science park. such as access to new markets. the range of resources sought in host countries is wide and cuts across the entire value-added chain. but also functions like accountancy. products or technologies. Production in a market may also be desirable if the costs of production are subject to wide fluctuation derived from exchange-rate changes. Typically. Resources including created assets and infrastructure have to be available at internationally competitive prices. Specialized resources .combination of the principal determinants of FDI location in a liberalizing and globalizing world economy and to seek to match it with the strategies pursued by competitiveness-enhancing TNCs. although pricing may matter less in the case of specific assets that enhance competitiveness in non-cost-related areas.

The reasons for conducting R&D abroad include both the need to create new core products and processes and the need to acquire knowledge necessary to advance the productivity of domestic R&D (Dunning. 51). New York Times . quoted in Dunning.7 (Dunning. 11 per cent of United States registered patents of the world's largest firms were generated by research undertaken in countries outside the home country of the parent company (Cantwell and Harding. When Texas Instruments decided to invest in the area in 1986. as well as a Department of Electronics to target software development. India has also established institutes of technology. 1998b). The Government of India and its Department of Electronics responded by establishing software technology parks. a United States TNC. foreign semiconductor or computer firms have established research facilities in California. Knowledge-seeking FDI in R&D operations IV. For example.Tr World Investment Report 1998: Trends and Determinants and encouraging the diffusion of technology are central here. 1997. the work of Texas Instruments drew in other computer-technology TNCs. based on the studies cited. R&D has been a corporate function typically carried out in home countries. 1998c. see also box IV. if not more importantly. 116 . The resources include technically sophisticated workers. it grew by a factor of 3. a “Microsoft picks England as site of research lab”. for example. 1996). which are educational institutions designed to provide technical skills. Developing countries that have built up specialized training facilities. while sales increased by 2.4. the availability of a large number of computer-literate technicians and researchers as well as of research centres were decisive variables. while foreign pharmaceutical and chemical firms have settled in New Jersey in order to tap industry-specific knowledge networks available in these locations. R&D is increasingly undertaken abroad. Source : UNCTAD. a Similarly. research centres or science and technology parks have also become host to industries intent on using high-tech inputs. Most of these are concentrated in developed economies and this is where most R&D still takes place. more visibly. as well as policies that stimulate partnering and networking among domestic and foreign firms. between 1991 and 1995. A study of Swedish firms. commenting that “going to Europe gives us a way to hire people who bring new talents and new perspectives to our work that we couldn’t get any other way”. 1998b). Important also are all other policies that encourage the strengthening of created assets and the development of clusters based on them. the exchange of information that takes place among technical staff concentrated in a given location and. 1997. 13-16). One study has found that. That firms from developing countries are increasingly participating in cross-border R&D partnerships with firms from developed countries (chapter I. Bangalore. these were initially centred on the aeronautics industries of Karnataka State. Microsoft. specialized university or other research laboratories.5 and employment by 1. expenditure on R&D undertaken by foreign affiliates in the United States has been growing disproportionately faster than the size of their operations: between 1985 and 1995. pp. as these underpin the ability to create assets. has established a research laboratory in the United Kingdom. resulting in a virtuous R&D cycle (Lateef. In turn. India is one example of a district featuring a large number of government and statesupported research institutes. be it on their own or in partnership with foreign firms in the interest of national growth and development. for example. In 1994. • Equally. 1996). FDI in R&D operations is attracted to locations that feature particular kinds of intellectual resources.8. Box IV. 18 June 1997.B. created assets (like the principal locational determinants in general) are also beneficial to national firms and facilitate their growth and competitiveness. Under competitive pressures.8) is an encouraging sign in this respect. found that firms located R&D in countries that specialized in their products’ production so as to have access to knowledge in the host country’s centres of excellence and to benefit from localized spillovers (Fors and Zejan. some 90 per cent of research by foreign affiliates of United States TNCs was conducted in developed countries (Mataloni and Fahim-Nader.8. p.

Chapter IV D. Bilateral investment treaties Bilateral investment treaties (BITs) were originally concluded between developed and developing countries. Moreover.3). forthcoming b). so there are examples of countries with large FDI flows and few. BITs are also concluded between developed or developing countries on the one side and economies in transition on the other. And. could exert a significant impact on FDI flows.500 treaties in existence at the end of 1997 date from the 1990s. with the rapid proliferation of BITs in the 1990s. plurilateral and multilateral -. but only in tandem with other factors. whether they can also influence FDI flows. the distinctive influence of BITs as a signal to attract additional investment may have been eroded. Both an analysis of time-series data on bilateral FDI flows in relation to 200 BITs.do indeed affect FDI determinants and. The number of these treaties increased significantly in the 1990s: about three-quarters of the over 1. At best. This section discusses the extent to which the most important of the existing or potential agreements -. 1996a. showed that variables such as market size and growth. BITs do not alter the economic determinants of FDI and they seldom provide for proactive promotion measures by governments (UNCTAD. A number of these instruments may influence some of the FDI determinants and thus exert an impact on FDI flows. The impact of international policy frameworks In their efforts to attract FDI and to influence its quality. just as there are cases of countries receiving substantial FDI flows without putting business facilitation measures into place. A comprehensive recent statistical analysis (UNCTAD. they are also being concluded between developing countries. they help to reduce the risk of investing in countries party to these treaties. Even such important economic determinants as large and growing markets or an abundant labour force do not work alone as FDI determinants. it would be unreasonable to expect that any improvements in the investment climate brought about by BITs. regional. countries increasingly conclude international agreements dealing with an expanding set of issues (UNCTAD. forthcoming b) confirmed the relative insignificance of BITs in determining FDI. by contributing to the improvement of an investment climate. if so. 1. in particular. Conversely. which relate only to parts of the FDI policy framework. BITs play a minor and secondary role in influencing FDI flows and explaining differences in their size among countries. exchange rates and country risk are more important than BITs as FDI determinants. there are also examples of countries that have concluded many BITs but have attracted only modest amounts of FDI. BITs exert some influence on the policy framework for FDI. BITs.bilateral. Since FDI flows are determined by a variety of factors. by strengthening the bilateral standards of protection and treatment of foreign investors and establishing mechanisms for dispute settlement (box IV. as compared to a period when such treaties were still comparatively 117 . In this manner. if any. 25 They do so. with a view to promoting investment between the treaty partners. either alone or together with other determinants. and a cross-sectional analysis of 133 countries investigating the relationship between total FDI flows and stocks and the number of BITs and other independent economic variables. Increasingly. 1996b).

To a lesser extent. Furthermore. the importance of business facilitation also rises. they have little or no effect. namely.also influences the countryspecific impact of the RIF on FDI determinants. as regulatory FDI frameworks become more harmonized within a region. If member countries choose to be exempted from RIF provisions and continue to restrict access to certain industries. A deeper RIF that also allows for the movement of capital (including FDI) would be expected to have effects on the investment determinants of TNCs beyond those induced by trade liberalization or growth alone. Similarly. Failure to implement RIFs fully means that their impact on FDI determinants cannot be pronounced. such exemptions can also influence FDI determinants. even if they are temporary. The credibility of RIFs. that they are enabling in character: by themselves. MERCOSUR and earlier the European Union. the speed with which a member country implements RIF provisions -. In addition. a shallow RIF that entails no more than tariff reductions among members and external tariffs on non-members can have an impact on FDI determinants through trade or strategic responses to competitors (static effects) and growth (dynamic effects). while it may be quite reasonable to expect the impact of a BIT on FDI flows to occur soon after its conclusion (as most of these analyses do).on FDI determinants depends on a variety of factors. because they have to be complemented by economic determinants and. undertaken by small and medium-sized enterprises. the influence of the RIF on FDI determinants can work through more channels. is another factor determining the impact of RIFs on FDI determinants. BITs may matter as a protective device for small projects. retain high tariffs for certain products or keep low environmental standards. more importance is attached by TNCs to economic determinants in deciding their precise location. 118 . Indeed. Finally. in specific circumstances. Regional integration frameworks The impact of regional integration frameworks (RIFs) 27 -. it cannot be ruled out that an impact may only occur many years later.which range from free-trade areas to complete economic integration -. They also place in doubt the member countries’ commitment to adhere to a given RIF. which determines the extent of policy harmonization and varies by type of RIF. manifested in the extent to which RIF provisions are actually implemented. abolishing tariffs -. the analysis mentioned above focused on the impact on FDI growth.26 This may well happen if important locational determinants of FDI are not yet in place in a host or home country. 2. especially those related to policy and economic conditions. At the one extreme. precisely because they have been implemented more strictly than their predecessors. First and foremost is the scope and depth of the integration envisaged by a RIF. have exerted greater influence on FDI determinants.for example.Tr World Investment Report 1998: Trends and Determinants rare. None of this means that BITs do not support the existing level of investment or prevent it from declining. as illustrated by the failure of numerous RIFs in the 1960s and 1970s to exert any discernible influence on TNCs.28 In general. There is some evidence that foreign investors encourage governments of home countries to conclude BITs with host countries in which they already have FDI. can be helped by investment facilitation measures. such as NAFTA. This is in line with earlier conclusions concerning policy determinants. 29 More recent RIFs. even if the amounts involved are too small to affect the total or even bilateral flows of the host countries investigated in these analyses. BITs are increasingly regarded by foreign investors as a standard feature of the institutional structure introduced in the past decade. as a region becomes more integrated as the result of a RIF.

The locations most successful in attracting FDI are likely to be those that provide the best opportunities for TNCs to exploit both country-specific and region-specific advantages. TNCs interested in investing in a region will still have to choose where to locate among member countries. 1997. In terms of the depth and scope of integration. had very little impact on FDI flows to Canada. Therefore. In the case of tradable goods and services.30 In the case of customs unions. RIFs can have a direct impact on the host countries’ policy frameworks for FDI. the principal influence of a RIF on FDI determinants would depend on how they address divergences in domestic policy. for example. are harmonized. the pre-existing. or among locations within a member country. The Free Trade Agreement between the United States and Canada (1989). in addition to their impacts on other categories of FDI determinants. for example. for example. either through multilateral rounds of tariff reduction or through sectoral agreements like the Canada-United States Auto Pact (Blomström and Kokko. p. with the restrictions often reflecting the level of development and structural characteristics of their economies. FDI framework 31 remains in effect after the implementation of the RIF. the case of the enlargement of the European Union). For example. other determinants come to play a much more important role in the locational decisions of TNCs. a common external tariff vis-à-vis the rest of the world is also adopted. particularly FDI capital. Being a member of a RIF implies that some country-specific location advantages may decrease in importance as FDI determinants. by the levels of trade and FDI barriers. in the case of NAFTA. For most RIFs that involve developing countries. The Free Trade Agreement meant that cross-penetration of markets through FDI was not especially required and this was evident in a decline in Canadian outward FDI to the United States (Blomström and Kokko. A distinction needs to be drawn here between RIFs confined to developed countries and those involving developing countries. market size is often redefined not in terms of the market of the member country that a TNC considers a potential location. NAFTA further opened Mexico’s service sector to FDI. while region-specific location advantages may increase (see discussion below). even if no provisions on the movement of other factors of production are included.Chapter IV A third factor is the prior interdependence of member countries and the established linkages among them. In these cases. For most recent RIFs among developed countries (e. For example.32 Not addressing the movement of capital explicitly in the RIF does not therefore necessarily detract from its impact on economic and business facilitation determinants. In choosing where to invest. TNCs consider region-wide factors together with factors that apply only to individual countries or to locations within countries. MERCOSUR and the revised Andean Pact. the movement of factors of production. partly because bilateral trade between the two countries had already been considerably liberalized prior to the Agreement. the United Kingdom has been one of the most successful countries in the European 119 . largely open. FDI provisions are included explicitly on both the inward and the outward side. as indicated. 17).g. 15-17). is often not addressed explicitly. most of the recent RIFs cover the middle ground: links among members are strengthened principally by reducing or abolishing tariff and non-tariff barriers. For countries that have already established significant links. In the case of free trade areas. Since the same definition of market size would apply to all RIF member countries. 1997. the pre-existing FDI framework is typically not open to the same degree for all members. pp. but in terms of the regional market. Regardless of the depth of integration prior to the introduction of a RIF. and policies including those affecting FDI.

performance requirements. because inward investment regimes are typically open even prior to the implementation of RIFs. even if RIFs have a positive impact on FDI determinants for the region as a whole. on national treatment. not all member countries necessarily benefit to the same extent. the policy framework for FDI. Other policy provisions contained in RIFs. as the example of Mexico prior to joining NAFTA illustrates. and not just the host country market. the central elements and the most important factors influencing marketseeking FDI are the liberalization of trade barriers and the granting of preferential market access to members. will become less of a bargaining asset for host country governments. namely.may be the least important for developed countries and most developing countries as far as inward FDI is concerned. It follows from the discussion above that. the set of economic determinants. Trade liberalization and trade policy coordination among RIF members 120 . the majority of RIFs do not explicitly address FDI policy. Mexico has benefited from the same consideration in the framework of NAFTA.34 Of these conditions. at least partially open FDI policies have typically been in place prior to the implementation of a RIF. regional The impact of regional integration frameworks on FDI determinants (i) The policy framework As mentioned earlier. on how restrictive the capital movement and investment regimes of the member countries had been prior to the implementation of the RIF. Economic determinants specific to individual member countries or business facilitation at the local level can thus become important. including provisions regarding the movement of capital. So the direct impact of explicit FDI provisions contained in RIFs on FDI policy determinants is likely to be small in many instances. are likely to be more important in determining FDI. may not necessarily contain explicit FDI policy provisions (Brewer and Young. adopted the Code of Liberalisation of Capital Movements in 1961.Tr World Investment Report 1998: Trends and Determinants Union in terms of attracting FDI because its locational advantages combine access to its own locational advantages with access to the wider European Union market. Even RIFs postulating a high degree of integration among members. though capital-movement liberalization did not accelerate until after the mid-1970s. For some countries. for example. most-favoured-nation treatment. The discussion that follows looks at the ways in which RIFs influence each of the three categories of FDI determinants. rules of origin. 33 although there is an increasing tendency for free trade agreements to include investment. In the overwhelming majority of RIFs. For the same reason. unless they result in a considerable liberalization of investment regimes. The overall impact of RIFs on the policy framework for FDI therefore depends on whether a RIF contains provisions liberalizing the movement of capital (including FDI capital). For small countries. therefore. Even in many developing countries.for example. 1998). and on other policyliberalization provisions contained in the RIFs. a. and the factors pertaining to the facilitation of business. membership in RIFs will enhance their location-specific advantages. notably trade policy. The OECD member countries. the size of the domestic market of large countries will no longer be as attractive and. the size of their domestic market will no longer deter market-seeking foreign investors in tradables since they will now have access to the region’s market. whether or not a RIF contains explicit FDI provisions -. especially those relevant to trade liberalization. dispute settlement -.

The prospective NAFTA Agreement. the size of the market is redefined 121 . prompted Mexico to liberalize its FDI framework even before the Agreement was signed. In some cases. They also allow TNCs to establish regionally integrated production networks to enhance their efficiency. to harmonize policies. however. even though the liberalization of services and parts of the primary sector accelerated only after Mexico became a signatory. Apart from trade liberalization. to strengthen standards of treatment and protection. Dynamic effects of RIFs in encouraging higher rates of economic growth can help boost inward FDI. or their harmonization. or to liberalize it if is restrictive. Likewise. social expenditures. Such policy harmonization can act as a brake on a “race to the bottom” in competitive policy liberalization meant to attract FDI.g. trade discrimination against non-members in the form of tariff barriers makes the size of a regional market more appealing and encourages market-seeking FDI by TNCs not present in the region. to increase momentum to liberalize further. competition policy). RIF members may be encouraged to privatize. the harmonization of related policies among members can also play a role as FDI determinant. RIFs may also influence the speed of FDI (and trade) policy liberalization. Even if (as is often the case) pressures to liberalize do not apply to FDI policies per se. (ii) Economic determinants Market size and growth are the FDI economic determinants that are most affected by the implementation of a RIF. and a tier system was introduced to resolve that. seeks to ensure that working conditions. etc. usually with foreign-investor participation. RIFs can reaffirm their members’ commitments to adhere to liberal policies and bring about a momentum to continue the liberalization process in both FDI and trade. as a means of reducing the share of the public sector in their economies.Chapter IV contribute to a policy framework conducive to FDI because they create favourable conditions for foreign affiliates within the region to access regional markets for final and intermediate products. also exerts a positive influence on market-seeking FDI. for example. for example. The removal of non-tariff barriers. To put it differently: unless RIFs substantially alter national FDI policy frameworks. In the case of customs unions and free-trade areas. European Union environmental regulations seeks to ensure that FDI would not be diverted to members with lax environmental regimes. they will not have a major impact on FDI policy determinants from the point of view of individual countries. 35 For example. In the European Union not all countries were ready to deregulate their financial services at the same time. Their contribution to FDI policy determinants lies in ensuring member countries’ commitment to adhere to a liberal existing policy framework. to lock in liberalizing changes. member countries that are ready to deregulate a particular industry (e. and to encourage policies that ensure the proper functioning of markets (e. they can affect the overall policy framework of a member country in a manner that encourages FDI. financial services in the case of the European Union) may be obliged to wait until the other members of the RIF have reached a similar point.g. Finally. More generally. The “social charter” of the European Union. But the reverse may also take place: countries that are lagging behind in terms of deregulation of industries and liberalization of policies may be pressured to move faster by other RIF members. Most importantly. wages. would not differ substantially among members and thus give “unfair” location-specific advantages to some member countries.

The redefinition of market size from national to at least regional is encouraged if a common external tariff is imposed. 1996). facilitates access to regional markets. especially in transport and communications. Of course. This is exemplified by United States FDI in the European Union. the accessibility of a region’s market from a given location becomes an important FDI locational determinant. as firms previously serving the regional market through exports seek to become “insiders” and switch to FDI. Increased market size -. However. A survey of TNCs about the importance of different factors in attracting FDI into the United Kingdom conducted by the Department for Enterprise concluded that access to European Union markets was an important factor but access to the United Kingdom’s market was more significant for all types of FDI (Bachtler and Clement. say. which carries the implication that a single host country’s market size is no longer as significant a determinant of market-seeking FDI as it used to be before the implementation of the RIF. although less significant as an FDI determinant under a RIF. there may be advantages associated with becoming an “insider” in a regional area. linguistic and other less obvious barriers to doing business would remain (Motta and Norman. As the importance of market size as an FDI determinant becomes more uniform for all countries that are members of a RIF and as the removal of cross-border barriers within the region increases competitive pressures. even if all trade and investment barriers between countries were removed. the location advantage of a large regional market may not be what it used to be. The possibility of accessing a market wider than that of a single country for tradable goods and services becomes an inducement to invest in the region. In a liberalizing world of falling barriers. unless the RIF also dictates some protection. This can induce at least some import-substituting (tariff-jumping) FDI. All this is made possible by the removal of intraregional trade barriers within the region. good physical infrastructure. So accessing an individual member country’s market. for both market-seeking and efficiency-seeking TNCs. A part of United States affiliate sales in the European Union are geared to the regional market: their sales in the European Union in countries other than the host country itself accounted for 31 per cent of their total sales in 1995. through a common external tariff. as would the importance of proximity to local consumers. such as benefiting from rules-of-origin regulations (Eden and Appel Molot. the regional market may still be an attractive location as long as the RIF eliminates obstacles beyond tariff barriers or facilitates business transactions. In addition. 1990). even in the absence of a common external tariff. and whether TNCs had already invested in the national markets prior to the RIF. The extent to which this takes place depends on how heavily protected the host (regional) market becomes after the implementation of a RIF.from national to regional or global -. cultural. In addition to abolishing customs-clearance procedures that help speed up border crossings. determinants related to enhancing efficiency come to play a bigger role for all types of FDI. All this means that regional integration frameworks increase the geographical scope and size of “effective” markets because they increase the ease of access within member markets through the removal of trade and other barriers. The importance of infrastructure as an FDI determinant is therefore enhanced considerably when a RIF comes into effect. cannot be discounted.36 With the implementation of a RIF.Tr World Investment Report 1998: Trends and Determinants under a RIF as the size of the region’s market. 1993).is in itself an efficiency-inducing determinant because it provides the demand dimension that gives rise to the possibility of exploiting economies of scale and scope in 122 .

TNCs can access the skills. Dunning. The European Union. Increases in intraregional and extraregional crossborder acquisitions designed to access resources or defend competitive positions often accompany RIFs. one of the primary advantages of enlarged markets under RIFs is that they create the demand conditions that allow TNCs to reap economies of scale and scope in all parts of the value chain. 1998).subject to certain restrictions on the transfer of technology to non-member countries (Brewer and Young. for example. 1993a). Proximity to a cluster of companies producing similar products or having similar R&D facilities. for example. 1993). and other resources (UNCTAD. the removal of internal tariff barriers was not 123 . 1996). the heterogeneity of administrative procedures. It may very well invest in a bordering country in close physical proximity to the cluster of companies or R&D facilities. Such costs arise directly from inadequacies of information. About one-quarter of Japanese manufacturing affiliates in Western Europe established during the mid-1990s were established through acquisitions. technology. (iii) Business facilitation The primary effect of RIFs on business facilitation FDI determinants is to reduce intraregional business transaction costs. 1991. allows all foreign affiliates regardless of their location within the Union to participate in European Union-sponsored R&D projects -. RIFs help to create both the demand conditions and the production conditions needed to improve efficiency in production. Indeed. In many RIFs. some labour moves across borders in response to TNC employment opportunities. Recognizing the importance of business facilitation obstacles. Finally. In the case of the European Union. Furthermore. When RIFs allow the movement of labour. RIFs promote greater competition to capture expanded markets or increase market shares within the region. but more concentrated in terms of geographical space. for example. 1991.Chapter IV production and distribution.37 Thus within regions. a greater concentration of FDI in a few supranational clusters may develop that allows FDI to be more dispersed in terms of country distribution. Firms may respond to the increased competition for markets by establishing a physical presence. which may mitigate the importance of the skill-seeking motive for FDI within the region. and differences in business support measures. cost considerations are especially important for efficiency-seeking TNCs (Burgenmeier and Mucchielli. especially if arm’s-length competition through trade is hindered by a common external tariff. Robson. need not necessarily require that a TNC invests in the same country where these companies or facilities are physically located. some RIFs seek to harmonize efforts to remove them or replace them with comprehensive region-wide programmes for FDI facilitation. RIFs give foreign investors the opportunity to be close to clusters of companies producing similar products or having similar R&D facilities and thus to exploit regional as well as sub-national agglomeration economies and obtain access to created assets. technologies or other strategic assets available in member countries other than those in which their production operations are located. In sum. RIFs allow such TNCs to locate each value-added activity of the production process in the most cost-efficient location within the region in order to rationalize operations regionally by taking advantage of productivity-adjusted cost differences in labour. compared to 10 per cent of those established in 1990 (JETRO. On the production side. asymmetries in doing business in different countries. 1993a. RIFs also influence TNCs’ access to resources.

providing social amenities and marketing a country as an investment location usually fall outside the scope of RIFs. as they concern matters which individual member countries -. 1997. took precedence over market-access considerations in the manufacturing sector. and can therefore be used by each RIF member to enhance location-specific advantages. such as certain macroeconomic changes. regional The impact of regional integration frameworks on FDI flows From aggregate FDI data it is difficult to determine the impact of individual FDI determinants on investment flows or stocks received by a region or by specific member countries within a RIF. This is because FDI determinants work together under RIFs as well as in combination with factors unrelated to RIFs.and. 1997). 1993) and particularly from the United States (table IV. and policy coordination and harmonization gives rise to a more level playing field. Prior to 1985 (when the Single Market Programme was initiated). One result is precisely a proliferation of incentives used to attract FDI (UNCTAD. in the sense that it describes the one-time impact of RIFs on FDI. NAFTA (RIF among developed-developing countries) and MERCOSUR (RIF among developing countries). there still remain important differences among members that allow them to compete for FDI. although market access continued to be important in services. The 1992 Single Market Programme had not only a positive quantitative impact on FDI inflows but also a qualitative one.can address to distinguish themselves from one another when competing for FDI. b. Since RIFs allow a region’s market or many of its resources to be more easily accessible by TNCs from any location within the regional bloc. the Single Market Programme led to substantial intraEuropean-Union FDI flows as firms sought to acquire market positions within the new 124 . members of the European Economic Community (EEC) received increased FDI inflows mostly from outsiders (Dunning.Tr World Investment Report 1998: Trends and Determinants sufficient for creating a unified regional market because of other obstacles to intraregional transactions. and removed about 90 per cent of them in 1993 as part of the single market programme (Yamazawa.2). 1997). procedures for APEC-wide accreditation of standards. 1997). Even if some business facilitation measures are harmonized across members. Only inferences can be made about the extent to which a particular determinant is responsible for that impact. the evidence presented below is largely static. business facilitation factors become increasingly important. APEC has a comprehensive programme to facilitate trade and FDI whose objectives include “smart card” visas for shortterm travel. The European Economic Community identified 280 barriers to cross-border transactions in 1985. The evidence presented here relates to the overall impact of RIFs on FDI flows or stocks. 1995a). increasingly. UNCTC. especially in services. Between 1957 and 1972. 38 This section examines three cases of RIFs: the European Union (RIF among developed countries). sub-national authorities -. as corporate adjustment and efficiency considerations by “insiders”. and minimum restrictions on arrival in a member country (Yamazawa. foreign affiliates as well as European Union firms. the share of the EEC (6 members) in the outward stock of the United States increased from 7 per cent to 17 per cent. Dynamic effects of RIFs on FDI deriving from increased growth rates or heightened competition are much more difficult to assess. Furthermore. In fact. Accessing the EEC market in the presence of nontariff barriers seems to have been the principal motivation of this wave of FDI (Dunning. Measures aimed at targeting specific investors.

United States foreign affiliates in services.1 1957 6. (The investment boom in the United States in the aftermath of NAFTA is largely unrelated to NAFTA. In other words. United States TNCs did not rush to invest in the European Union to the same extent as Japanese firms. falling slightly to $9.4 1972 17. able IV.0 1967 14. experienced one of the faster growth rates in FDI among all European Union members between 1983 and 1992 (table IV. Per cent 37 33 27 27 22 14 14 5 While FDI flows to the NAFTA region increased immediately before and after its implementation.4 Source : 1955 6. EEC (9) member countries. Except in the case of services. Tab le IV. resources and efficiency). Spain and Portugal benefited greatly from EEC membership.2. able IV.) Mexico’s liberalization of FDI policy (locked in and reinforced by NAFTA provisions). to over $10 billion in 1994.6 1962 10. Gro inward flows. despite the peso crisis. a skilled workforce and advanced business facilitation measures.3. 1983-1992 (Percentages) Country Denmark France Belgium-Luxembourg Ireland Netherlands Italy United Kingdom Germany Source: UNCTAD. outward stock Tab le IV. 1993). FDI/TNC database. FDI flows into Mexico in the context of NAFTA were governed by a combination of economic determinants (market size. however. proximity and guaranteed access to the United States market (as long as local content requirements were satisfied). One exception was Japan: as a latecomer. policy liberalization and lower wages.3).1 UNCTAD. induced by access to the regional market. with both countries receiving record FDI inflows in the years before and immediately following their accession. policy 125 . FDI inflows to Mexico doubled to over $4 billion annually and in the years following NAFTA they increased even more. Share of the EEC (6) in United States' outwar d FDI stoc k (Percentages) 1950 5. did expand their capital expenditures (Lipsey. and the availability of lowcost labour all led to substantially higher FDI inflows into Mexico.Chapter IV framework (UNCTC. FDI/TNC database. it was in Mexico that NAFTA had a noticeable impact. with a stable macroeconomic environment.3.2. 1990). In the years immediately before NAFTA. it invested heavily in the European Union in the late 1980s and early 1990s in both manufacturing and services. having established their desired investment positions earlier on.5 billion in 1995. At the country level. Gr o wth rates of inwar d FDI flo ws. Ireland. good infrastructure.

Especially in Argentina and Brazil -. However. But. In general. From the point of view of each member country. The impact has been the greatest when the changes in any of the categories of FDI determinants brought about by the RIF have been the most profound. Conclusion Under RIFs. clusters) may see their locational attractiveness further enhanced. 1997). but to a varying extent. access to the regional market supersedes access to national markets as an important FDI determinant. Not being left behind in the harmonization process and establishing good infrastructure facilities 126 . Market-access considerations.Tr World Investment Report 1998: Trends and Determinants considerations ( the greater FDI protection awarded by NAFTA). 1997). It appears that RIFs have contributed positively. In sum. With the creation of RIFs. and provisions to promote and protect FDI appear to have helped to attract investment (Blomström and Kokko. This suggests that successful host countries are those that possess the right combination of location-specific advantages to match the ownership and internalization advantages of the firms that have decided to invest in the region. coupled with trade liberalization. MERCOSUR provides access to a market of some 200 million people in Argentina. in particular.the two countries that have benefited the most in terms of FDI flows -.g. are now assessed from a regional rather than national perspective. Brazil. FDI flows into MERCOSUR as a whole increased immediately before and after its implementation in 1995 ($10 billion in 1995 and $17 billion in 1996). functioning RIFs can enhance the location-specific FDI determinants of member countries. and specific provisions at the sectoral level (Blomström and Kokko. there are disparities in the distribution of investment among member countries (and among regions within countries). as in the case of NAFTA. In particular. especially to privatization and the success of national macroeconomic reforms. associate members since 1996). 1997). to the growth of FDI into the recipient region in all the three cases discussed above. what becomes important for FDI in tradable goods and services is its ability to provide good access to the region-wide market. the choice of the country in which a TNC invests still depends on its evaluation of the location-specific determinants that the country offers. Paraguay and Uruguay (as well as to Bolivia and Chile. This depends on how well it is integrated into the regional bloc in terms of policy harmonization as well as physical accessibility. it is not obvious how far FDI gains have been the direct outcome of MERCOSUR. MERCOSUR has helped to consolidate these changes. however. On the other hand. Nevertheless. low-wage locations in a RIF that rate well on the principal FDI determinants may be able to attract substantial FDI flows geared towards the larger market. the decision to implement privatization programmes had begun before the implementation of MERCOSUR.investment inflows have responded in part to non-RIF factors. it is difficult to attribute any FDI gains to the MERCOSUR framework alone (Blomström and Kokko. Within regions. like market size or access to certain resources. It also suggests that governments may need to pursue active regional policies to see that the benefits of integration are shared throughout the region. The availability of natural resources has also been a magnet for FDI. Macroeconomic reforms as well as trade and investment liberalization and. some of these determinants. RIF locations that have already attracted considerable investment (e.

less frequently addressed by RIFs. The existence of a greater variety of production inputs at a wider choice of prices means that TNCs can make better choices within regional blocs than in a single country alone. with access to the region’s market already being assured by the RIF. one of the dynamic benefits of RIFs. On the policy front. social amenities and other business facilitation services to foreign investors. Such strategic responses to RIFs by TNCs can be expected to boost FDI in a regional bloc. assetaugmenting and asset-exploiting FDI can take advantage of location-specific immobile factors of production or resources within the region. but it does imply that their distinctiveness as countryspecific location advantages diminishes for the members of a regional arrangement. So. for example. For the region as a whole. Regional integration frameworks also allow TNCs to take advantage of a greater number of FDI determinants without having to trade one determinant against another. come to play a more important role in the competition for FDI. also increases. 127 . for example. acquires a new dimension in a regional context. as firms try to position themselves in the best possible situation to benefit from a RIF. as national locational advantages become less distinct. This does not mean that policy determinants are not important. they give rise to more competition for FDI among member countries (or locations within countries). This does not mean that national markets or growth no longer matter. it is the region’s growth that matters more. and reaffirm the protection of foreign investors. can be achieved without having to sacrifice access to location-specific resources that help to enhance efficiency. RIFs can give policy determinants a boost in importance. RIFs can accelerate the process of trade and FDI liberalization. Many of these resources are created assets that can be accessed through formal or informal links with supranational (or sub-national) clusters of companies or research facilities giving rise to agglomeration economies. Sustained increases in growth rates. they remain important FDI determinants. domestic or foreign. especially for non-tradable services. The greater openness that exists within RIFs gives rise to more competition among firms. In particular. Efficiency. It is more likely under RIFs that firms will position themselves in such ways as to exploit first-mover advantages ahead of their competitors and that they will be more inclined to engage in cross-border strategic alliances. come to play a more important role in location decisions under RIFs. Production-related FDI determinants. but they matter less. this makes regions attractive locations. business facilitation factors. Under such conditions. In the case of NAFTA. Access to enlarged markets. ensure its continuity. greater uniformity of trade and other policies that influence FDI means that TNCs can expect similar treatment across the region. national governments or sub-national authorities can attempt to influence TNC location decisions. as opposed to determinants related to demand. Again.Chapter IV therefore acquire greater prominence as national FDI determinants. too. and not national growth. On the one hand. on the other hand. The likelihood that FDI will be affected by reactions to “strategic” moves of other firms. also help to boost FDI. at the regional level. transparency and stability. By offering after-investment services. foreign automobile manufacturers can still reap the benefits of lower costs in Mexico without losing access to the broader North American market. A number of proactive measures to facilitate international production can be carried out fairly rapidly by national governments.

are discussed below for purely analytical purposes. lead to higher FDI flows around the world. Although such a framework might also affect some elements of business facilitation (such as investment incentives).and since there is little information about how TNCs would incorporate a variable such as an MFI into their locational decisions -.Tr World Investment Report 1998: Trends and Determinants In conclusion. how would it affect the volume and pattern of FDI flows? Since an MFI is only a hypothesis and not a reality -. based on differing assumptions. by making FDI policies potentially more similar. Such an outcome is based in part on the assumption that a multilateral agreement would not only consolidate recent changes towards 128 . Intraregional competition for FDI through business facilitation is thus not only likely to intensify but may also take place increasingly at the sub-national level. become more significant as they are among the few areas on the basis of which member countries (or locations within countries) can compete for FDI. Because an MFI is only a hypothesis. This section does not deal with the advantages or disadvantages of an MFI. including their ability to negotiate with foreign investors on the basis of such advantages. and the extent to which a member country is able to tap into it in order to enhance its own location advantages.1). in particular. including the possibility of plurilateral and multilateral frameworks (chapter III. The regional context. discussions on international investment frameworks have intensified. but with a hypothetical question: if there were an MFI.40 One conceivable outcome of an MFI is that it would help to increase FDI flows -. scope and safeguards.39 The discussion is thus at an abstract level and should be read with the understanding that the specific implications of each scenario would vary from country to country in accordance with specific economic and developmental conditions and specific national stances vis-à-vis FDI. an MFI would underline the importance of economic (and business facilitation) factors in determining FDI flows. as locations within member countries compete for FDI more fiercely than countries themselves. including definitions. it would not involve significant and direct changes in the principal economic determinants. although not the most significant category of FDI determinants. The precise effect of an MFI on the policy-framework cluster of determinants would depend on its content. The potential impact of a possible multilateral framework on investment In recent years. The development of an MFI. 3.answers to this question are unavoidably tentative. become more important for the location of FDI. three scenarios. would represent a change in the policy-framework cluster of determinants (table IV. if such a framework were to be negotiated. Indeed. RIFs diminish the ability of member countries to attract FDI on grounds of country-specific location advantages alone. 1996a). Business facilitation measures. The challenge for RIF members (or sub-national locations) is to marry their own distinct locational advantages with the advantages that the region offers to create an environment that complements the ownership and internalization advantages of TNCs. One of the questions that has been raised in this context concerns the extent to which a possible multilateral framework on investment (MFI) would influence investment decisions and. UNCTAD.and perhaps affect other features of such flows as well.

A third conceivable outcome of a possible MFI is that it would have little or no impact on the quantity and quality of FDI flows. and countries whose current policies. an MFI might reduce FDI flows to countries that gain from the currently restrictive policies of their competitors for such investment and increase flows to otherwise desirable locations that are receiving little inward FDI because of uncertainties about policies. predictability and transparency resulting from an MFI would create a generally more favourable climate for investors. as they are largely influenced by other FDI determinants. the extent to which a formal binding of the regulatory framework at a less liberal level would affect FDI flows is unclear. 129 . there would be no significant effects on the geographic patterns of FDI flows. during the 1980s and 1990s (chapter III. the other FDI determinants that would come into play at that point. the nature of national commitments and exceptions to the generalized multilateral rules and. on this view. would provide protection for investors and could be easily extended to additional countries.) Such an MFI could also alter the patterns of FDI flows across geographic regions and industries. In particular. standstill provisions -.and whether there would be a change in the quality and patterns of flows -. the extensive network of bilateral investment treaties. plurilateral or multilateral investment agreements. of course. an MFI that contains. which numbered over 1. *** On balance. Moreover. in particular in many developing countries and countries in transition. Finally. these considerations suggest that an MFI would improve the enabling environment for FDI.when it comes to the protection of FDI and the stability of domestic FDI regimes.2). A second conceivable outcome of an MFI is that it could actually reduce the quantity and quality of FDI flows. whether or not FDI flows would actually increase -. the MFI that would result could conceivably enshrine a less liberal multilateral environment than has already evolved unilaterally or regionally. This. At the same time. table III. lower standards of investment treatment or measures likely to impair the proper functioning of markets -. their treatment of foreign affiliates and the functioning of their markets are concerned. as it would not materially alter the policy framework for FDI. predictability and transparency in investment policies and rules.would essentially maintain the status quo.500 by the end of 1997 (chapter III). regional. as far as the openness of economies to FDI.requiring countries to commit themselves not to introduce new barriers to FDI. The impact on inflows might be greatest for those countries that were not already signatories to bilateral. Even in the absence of further liberalization. to the extent that it would contribute to greater security for investors and greater stability.as compared with unilateral or even bilateral measures -. because the negotiation of an MFI would take several years. are not considered sufficiently predictable by investors. and this liberalization has contributed to a surge of FDI flows that reached a new record in 1997. Therefore. One reason why this might be the result is that there has already been significant liberalization in many countries. Further.would depend on the precise content of an agreement. even if negotiations did produce an agreement.Chapter IV more liberal policies by many countries but would incorporate "rollback" provisions -requiring countries to commit themselves to reducing or eliminating existing barriers to FDI and strengthening investment protection and the proper functioning of markets. creating uncertainties about the investment climate worldwide and thereby discouraging foreign investors. (However. even if favourable to FDI. for example. The presumably greater stability. a multilateral framework could facilitate investment by providing stronger assurances -.

it is precisely the function of an enabling framework to allow other determinants. leading to a drastic reduction of FDI inflows. that investors tend to favour what they know. Governments can influence the other two conditions but only indirectly -. On the question of tax competition. location. pp. Department of Commerce. always a potentially attractive host country because of its market size. it was the largest recipient of FDI among developing countries. it introduced policies aimed at restoring macroeconomic stability and at re-attracting FDI. confirmed by evidence. In the early 1990s. degree of competition and other elements of ownership and internalization choices. and to begin to grow rapidly. three years after the reforms started. For a discussion of the effects of the 1997/1998 currency devaluation in Asia on FDI. How much difference an MFI would make.also the ‘eclectic paradigm’. It lost this position to other countries in the 1980s. which were found insignificant as determinants of bilateral FDI flows among Canada. 147-148).41 Notes 1 2 3 4 5 6 7 8 9 10 The analytical framework on which this description is based is known as the ‘OLI (ownership. Ramstetter. 1997a) -. as a result of the loss of macroeconomic stability. and especially economic determinants. In general. and the United States (Goldberg and Kolstad. 1997c.especially the possible role of such an agreement in providing a framework for intergovernmental cooperation in the area of investment (UNCTAD. see chapter VII. equal access to short and long term borrowing will favour larger TNCs firms. if no speical measures are put in place to facilitate loans to SMEs. in terms of the quantity. forthcoming a). thereby reducing the imperfect nature of technology markets and thus affecting transaction costs. to assert their influence. provides a good example. pp. Japan. it took two to three years for FDI flows to take off again. 119-148 (and earlier articles in the same series). forthcoming a. a lack of knowledge being strongly associated 130 . therefore.for example. As TNCs increasingly seek to hone their competitive advantages. however. it was clear that many CEOs were not yet convinced that the Brazilian reforms would hold (UNCTAD. internalization) paradigm’ -.Tr World Investment Report 1998: Trends and Determinants in turn. 1995a and 1995b) also suggest that exchange rate levels have not generally had a statistically significant effect on FDI in these countries. Expectations about the impact of an MFI on FDI flows (if it were indeed to be negotiated) in comparison to the current regulatory framework and the direction in which it is developing should.12. through the promotion of cross-border partnerships in R&D. could encourage higher FDI flows and potentially some redistribution of those flows. Estimates for Malaysia and Thailand (e. changes in exchange rate levels are expected to have a greater impact on FDI than differences in exchange rate levels. For example. and regard territories they do not know as risky. In the 1970s. other issues that need to be considered in connection with a possible MFI -. particularly to countries whose investment climates would newly reflect the multilateral framework. See United States. of course. Germany. 1996a. Brazil. see chapter III. 1993). the United Kingdom. quality and patterns of actual FDI flows is difficult to predict because as in the case of BITs. not be exaggerated.g. From the perspective of local SMEs. There are. even within the same industry (UNCTAD. Interest rates were found to be a factor influencing flows of FDI from the European Union to the United States (chapter V). equality of conditions can create an imbalance that favours large foreign firms. While the stability was restored almost immediately. Known in the FDI literature to be a factor influencing locational decisions (Johanson and WiedersheimPaul. box III. It is based on the premise. In interviews with CEOs of TNCs conducted for a study on FDI in Brazil in spring 1996. 1994). their strategies can become quite diverse. which is specifically focused on the determinants of FDI flows.but these fall outside the scope of the present analysis.

1982) and a study of FDI flows from 14 home countries to 45 host countries in 1990 and 1991 (Wei. on the whole. may be counterproductive or even harmful if they create perceptions and expectations not in line with reality.Chapter IV 11 12 13 14 15 16 17 18 19 20 with the fear of negative possibilities. see the programme of the Republic of Korea. and some of them cost a lot of money. failed to confirm the common-sense expectation that low wages would be an important factor in attracting FDI into a host country. such as Japan. levels of development. Other reasons for the less frequent use of performance requirements include the fact that the TRIMS agreement stipulates the phasing out of certain performance requirements that distort trade (e. 1998) (see also chapter IX. culture. Hungary and Western European countries at a disadvantage. A number of econometric studies. including after-investment services as determinants of FDI. however. Therefore. First. many of these activities are very difficult to carry out and. generating a psychic distance between home and host countries. as determined by the relevant policy framework.11. Investment promotion activities. pp. It should be noted as well that daily contact with foreign investors resulting from rendering these services puts IPAs in a unique position. For example. which could enable them to be the first to identify faulty policies and. going back to the 1960s and forward to the mid-1990s have. both promotional actions and incentives cost money. perhaps these are even more numerous than national programmes. on the occasion of introducing a new package of incentives in the Czech Republic: “Up until now the Czech Republic has been competing with Poland. Promotional actions can contribute to reducing it further. convergence has limits. box VII. they take time (e. In addition. Among these are a study of manufacturing affiliates of United States TNCs in 1966 (Kravis and Lipsey. It is being progressively reduced by modern tools of communication. the national investment promotion agency. export requirements). is not constant. 1995a. 1997a and 1997b). the size of the relevant market. This type of investment is highly mobile because non-equity forms of FDI involve control but not ownership and this reduces the cost of closing down or abandoning foreign affiliates. Low wages are a positive determinant of FDI but only other things being equal. Second. 45 and 52). which tend to focus on fiscal incentives (UNCTAD. Third. if not well-grounded in a favourable investment environment. known for strong promotional programmes. The discussion here focuses on business facilitation. virtually all of the states in the United States have such programmes. 291-292). for example. However. pp.g. or states within countries. The other point to note is that even productivity-adjusted wages are only one factor among others and their influence on any particular investment decision depends on the context of that decision.4). Hence. as the host country develops and acquires higher standards of living. including promotional offices abroad in large home countries. However. box IX. there is a growing awareness that promotional programmes and incentives should be carefully tailored to the needs of individual host countries and not simply copied from the programmes of other countries (UNCTAD. final consumer goods produced by foreign affiliates may be redirected to its own domestic market. optimally. reducing corruption). studies of the determinants of location decisions taken by foreign firms in one and the same country are likely to be more useful for analyzing the relationship between wage levels and investment 131 . developing countries and economies in transition typically do not have pockets as deep as developed countries when it comes to financial incentives. This lack of knowledge is deepened by differences in language. many programmes are executed at the level of regions. regions and large cities in Europe have similar programmes. become champions of reforms. Psychic distance. Increasingly. political systems. This package [of incentives] will enable the Czech Republic to compete on equal terms for prime mobile direct investment projects looking for a low-cost. even if carefully planned and well executed. which was established in 1995. What matters is not wage levels as such but these levels as adjusted for the productivity of labour inputs. Characteristic in this regard is the following statement made recently by the head of CzechInvest. chapter VII. But after-investment (or aftercare) services can also be rendered with a view towards maximizing the FDI contribution to local economic development (Young and Hood. highlyskilled location in Europe” (CzechInvest. etc. There is rather less here than meets the eye. For a recent example. trade and travel. 1994.g. 1997b). but not yet members of WAIPA. This number does not include such countries as the United Kingdom and France. and the like. levels of education.

Needless to say. p. mainly at the sectoral level on the inward side. 1996a. where the asset sought is skilled labour. in export processing zones. TNCs were attracted by markets that were protected by tariff barriers in the period preceding efficiency-seeking and competitiveness-enhancing FDI. among other things (UNCTAD. in the Republic of Korea). which had to wait for the 1992 Single Market Programme to come into effect. there are virtually no restrictions on the outward side (Brewer and Young. the Australia-New Zealand Closer Economic Relations Agreement covers trade in goods and services (including labour mobility). For example. p. But RIFs other than common markets and economic unions may also contain explicit FDI provisions for their members. Article 73 of the Maastricht Treaty “grandfathered” existing FDI restrictions. where there are alternatives to them. 182). TNCs can instigate closer integration not only through cross-border arm’s-length transactions (trade). that is. NAFTA contains explicit FDI provisions on standards of treatment (national treatment and most-favoured-nation clauses). 1996). forthcoming a. Economic integration. for example. since this reduced competitive pressures from imports while simultaneously allowing higher earnings (see Mytelka. among members. cost/quality ratios and available quota (Mytelka. by definition. Part Two. creating conditions conducive to the entry of FDI.. Where these remained as enclaves and did not draw upon supplies from the local economy. this did not always hold true. Indeed. see UNCTAD. analyses of the location decisions of Japanese firms in the United States between 1950 and 1992 (Head. but does not cover investment. For elaboration on. however. 1993a. 1994) and of foreign investment entries into the United States between 1981 and 1983 (Coughlin. A good part of this type of investment has been located. their dynamic impact and role in the transfer of technology and in shaping local technological capacity were weaker than where these linkages were established (e. 1996). their contribution to the development of human capital is often limited and their vulnerability to price-and-productivity-based mobility is greater. 132 . where the resource sought is unskilled labour. But these were not enough to open various service industries to FDI. and it even applies to natural resources. Most RIFs that do address FDI policy are common markets and economic unions that. as mentioned earlier. 1998. In the case of the European Union. Regional integration frameworks -. 1994). There are also arrangements that are more partial in nature. In the textile and clothing industry quotas have been determined for many years by the Multi-Fibre Arrangement. price elasticity of demand. 1993a. The Gulf Cooperation Council. as various locations may compete for the mobile assets that are required to produce them. and strategic asset-seeking FDI. but also through intra-firm transactions among members of their corporate networks. For details see UNCTAD. 1991) found higher wages to have a deterrent effect on location decisions. leading to “shallow integration”. 148). import-substitution and domesticcontent requirements (Hufbauer and Schott. Ries and Swensson. the firms in these zones are less likely to upgrade rapidly. chap.g. Of course. in many instances. procedures for the settlement of disputes. such as regional growth triangles (Pomfret. for example. 1998). To a certain extent this applies also to non-tradable services. leading to “deep integration” (UNCTAD. has liberalized the movement of capital among member countries (Brewer and Young. the right of establishment et al. through transactions that promote greater interdependence and cohesion among economies. A RIF that allows the free movement of both labour and capital would also affect FDI determinants. the concept of complex integration strategies. 1993. the Treaty of Rome contained specific provisions on capital movements.the focus of this section -.Tr World Investment Report 1998: Trends and Determinants 21 22 23 24 25 26 27 28 29 30 31 32 33 flows than studies covering a variety of host countries. Products in this industry were subcontracted on the basis of “market niche”.are policy-led integration initiatives adopted by governments. 4). Terza and Arromdae. see also Lloyd. procedures for phasing out existing export-based and production-based performance requirements. this observation also applies to other components of an enabling FDI framework. all of which are relevant policy determinants of FDI. In general. and bans on new export-performance. can also take place in the absence of policy-led integration initiatives. and documentation of. 1991). allow the movement of capital. including FDI capital. In consequence. ASEAN members have adopted safeguards against nationalization and the provision of adequate compensation against expropriation. It would presumably reduce the need for resource-seeking FDI. It must be recognized that.

costs.Chapter IV 34 35 36 37 38 39 40 41 For services. For example. spread effects. language and responses to competitors’ strategies. this can be observed even before countries become members of a RIF. Indeed. p. Other important factors included skills. scheduled for publication during 1998-1999. What is new is that they are being considered more directly and more extensively. 4) that TNCs may act as catalysts for these dynamic effects associated with RIFs. privatization. This raises the question of polarization vs. They have reappeared from time to time. particularly during major rounds of trade negotiations. the liberalization of FDI regimes alone is not enough to attract investment. countries wanting to join the OECD or the European Union (through the association agreements) sometimes assume FDI liberalization obligations before they become full members. It has been suggested by Blomström and Kokko (1997. For a discussion of other issues. p. 1996a and 1997a. 133 . Policy changes as regards deregulation. see UNCTAD 1996a and the series of UNCTAD issue papers in progress. Many of the questions that are now being raised about a possible MFI were raised more than half a century ago at the time of the creation of the General Agreement on Tariffs and Trade (GATT). particularly in relation to rules and institutional mechanisms. they are in fact not new. For more detailed analyses of the issues involved in discussions of a possible MFI. 3) estimated that roughly three-fifths of inward FDI in the core countries of the European Community prior to 1985 was within a 500-mile radius of Frankfurt. Dunning (1997. Despite the fact that investment issues are still often referred to as being among the “new” issues on the multilateral agenda. see UNCTAD. the distribution of associated benefits and the need for regional policies. consumer protection and the like may also be required.

Tr World Investment Report 1998: Trends and Determinants 134 .

are statistically significant at the 1 per cent level. for the same set of countries over time. More than half of the variance in the investment levels is accounted for by these able IV.637** (0.1 presents a version of an explanation of the inward FDI stock in each of 142 countries at intervals between 1980 and 1995.534 (25. it is hard to derive any conclusion from these studies as to whether the list of determinants has changed over time or whether some have gained or lost importance. Several variables related to host country markets have appeared in some form in almost all of the past explanations of the extent of inward FDI. Tab le IV. A second is the rate of growth of the host country.591 1985 0.0414*** (0.780 1990 0.750) 0.950) 0. Table IV.485) 0. the growth variable is growth in real GDP over the previous five years. the measures of determinants.853) 1.A.144) 0.226 (0. One reason comparisons over time are difficult is that the measures of investment.187) 0.0298*** (0. The following analysis covers 142 countries over the period 1980-1995. In other words. past gr o wth in real GDP.1. and the average income variable is GDP per capita.1. which is related to their effective demand for the kinds of goods or services produced by foreign affiliates.A.0524*** (0.564*** (0. then. translated into dollars by average annual exchange rates.0022) -377 (2. in the expected positive direction.0046) -5. large markets and high-income markets attract more FDI. in three of the four years represented in the table. gro GDP. but past growth rates are apparently not projected into the future by potential investors. measured in current purchasing power parity (PPP) terms. based on these national market variables.Chapter IV IV.0549*** (0.439*** (0. An econometric test of market related FDI variables There is a long history of econometric analyses of factors determining the amount of FDI a country receives. However. There is some advantage. which can be thought of as a predictor of future market size. One is the size of the host country or. and the range of countries examined differ from study to study. more precisely. The nominal GDP and. inward stock GDP.404) 1. The measure of market size is nominal GDP for each year. of the host country’s internal market. measured in the same way. in performing such an econometric analysis using the same list of determinants.A.0025) 476 (1.previous five years Real GDP per capita R^2 Figures in parentheses are standard errors ** *** Significant at 5% level Significant at 1% level 135 .137 (13.579 Growth in real GDP .0065) 11. and real GDP per capita 1980 Nominal GDP 0. the real GDP per capita. A third is the average income of the residents of a country. Annex to chapter IV.682 1995 0.486) 0. Regression of nominal inwar d FDI stock on nominal GDP.

outside of their domestic market characteristics. initial market size. society. and continued to produce higher than average levels of inward FDI. In that case one would expect negative coefficients for the residuals. whatever their cause. red tape and corruption) and “political stability”. The coefficient for the growth of the host country market during the period increases in size over time and is statistically significant at the 5 per cent level for the final period. One possible interpretation of the residuals is that they represent transitory past events or policies that have caused some host countries to have larger investment stocks and other countries smaller investment stocks than would be the case if FDI were distributed host countries in a pattern optimal from the point of view of international investment allocation.A. Some recent literature on the determinants of inward FDI has focused on characteristics such as the extent of corruption (Wei. An alternative interpretation of positive coefficients would be that high levels of inward investment. Alternatively. that attracted further investment.2. 136 . Among the other variables in the equations of table IV. 1995). The coefficients of the residuals from the investment stock equations are strongly positive. or by countries that have modified their policies to be more restrictive towards inward FDI.Tr World Investment Report 1998: Trends and Determinants host-country market variables but the precision of the explanation reached a peak in 1985 and has been declining ever since. Host countries that have received more inward FDI than can be explained by their domestic market characteristics in a base year continue to receive more investment in subsequent years.A. Thus. that attract FDI to an exceptional degree. then the market variables and the change in real income for the current period can explain changes in investment over the ensuing five years. if it has received more investment in the past than would be expected from its domestic market characteristics. The results are shown in table IV. Negative coefficients could represent a catching-up to more “normal” levels by potential host countries which had been previously neglected or which had in the meantime made their policies more welcoming towards inward FDI. two are used here for further examination: “bureaucratic efficiency” (which combines ratings for three categories: judiciary system. 1997a. is the most consistent influence favouring further inflows of FDI. That decline points to the possibility that host country market variables have declined in importance relative to some other unspecified determinants of inward FDI. the inward flow of FDI during a five-year period is higher if the recipient country has a larger market. Positive coefficients might mean that the factors that produced high levels of inward investment relative to income and income growth were long-term in nature. negative coefficients might indicate a relapse to more “normal” levels in those host countries that had been favoured as FDI locations in the past but had then lost their advantages. If the residuals from these equations are taken as representing the effects of unspecified determinants of inward FDI levels. such as agglomeration economies. 1997b) and other aspects of the organization of the host government or. This result suggests that there may be permanent or at least long-term features of host countries. represented by nominal GDP. and if its domestic market has grown more rapidly than that of competing countries during the period. themselves created circumstances.2. After considering a variety of measures for 66 countries that are potential additional explanatory variables (Mauro. more generally.

532 Growth in real GDP . at least for a smaller sample of countries.167) 0. inward flow GDP. Tab le IV.572) 1.A.0275*** (0.A. they do not add anything to the explanation.571 Figures in parentheses are standard errors * Significant at 10 % level ** Significant at 5% level *** Significant at 1% level 1985 0. the equations of table IV.051) 0. while past real GDP growth is not a significant factor.629* (0.0400*** (0.249) Growth in real GDP .370) 0. the story they tell is much the same: nominal GDP and per capita real GDP are both positive influences.359) 0.2.771 1990 0.834) 1.071) -0.0086) -7.676 (30.2.065) 0.0504*** (0. and residuals fr om inward stock inwar d FDI stoc k equations 1980-1985 Nominal GDP 0.3.0473*** (0.2 are shown in table IV. Regression of nominal inwar d FDI flow on nominal GDP.Chapter IV able IV.0540*** (0. account for the unspecified influences incorporated in the residuals. Tab le IV.0033) -1. Regression of nominal inward stoc k of FDI on nominal GDP. able IV. past gr o wth in real GDP.0065) -1.228) 1990-1995 0.A.A.0314*** (0. these additional variables do not.849 (44.0023) 8.221** (3.662 1995 0.105) 1. gro GDP.482) 0.0017) -896 (2.824) 0. Thus.172) 0.623* (0. and real GDP per capita group f or a smaller gr oup of countries 1980 Nominal GDP 0.827 0.current five years Real GDP per capita Residuals (from reg of stock on inv on no GDP. While the equations do not fit quite as well.0036) 609 (7. If the government efficiency and political stability variables are added to the inward FDI stock equations of table IV. from current gr o wth in real GDP.3.750) 0.A.123*** (0.387*** (0.previous five years Real GDP per capita R^2 137 .180*** (0.684 R^2 Figures in parentheses are standard errors ** *** Significant at 5% level Significant at 1% level Since the additional variables are available only for a much smaller group of countries. no relationship is found. gro GDP.257 (4. If the residuals from this equation are calculated and related to the government efficiency and political stability variables.104) 1985-1990 0.628** (0.103 (0. its growth & real PC GDP) 0.367 (6.3.011 (0.0234*** (0.106) 0.A. inward stock GDP. real GDP per capita.771 1.A.508 (1.3 for this smaller group.0026) 4. The same is true if they are added to the inward flow equations (these equations are not shown here).814** (0.

135 (0.019 (0. and the explanatory power of the equations is considerably weaker for these countries.0208) 16.429) 1988.239 (7. the political stability variable is added and here.427) 0.Tr World Investment Report 1998: Trends and Determinants It has been argued that government-related and political variables would be more important in developing countries than in developed countries.367 (3.0638*** (0.145) 0.259* (1133.718) 0.150 (7. real GDP per capita.0200) -1. and real GDP per capita.A.0714*** (0.0785*** (0.317 1990 0.038) 0.604 Growth in real GDP .815) 0. They again confirm the predominant influence of host country market size. past gr o wth in real GDP. Per capita income.0136) 11.0657*** (0.560 (0.312 (21.746) 0. is not generally statistically significant.1297*** (0. Regression of nominal inward stoc k of FDI on nominal GDP.378 (0. Tab le IV.A. Regression of nominal inward stoc k of FDI on nominal GDP.162) 511. gro GDP.635) 0.638) 0.908** (953. gro GDP. for the first time.104 (3.719 (20.254 1990 0.538 (526. with larger coefficients than for the world as a whole.0092) 3.491 1995 0.624) 3054.five years Real GDP per capita Political stability R^2 138 .5.0194) -2.A.385) 0.A.851 (3.311) 0. The results are shown in table IV.0092) 2.165 (0. Tab le IV.4.419) 0. In table IV.4. able IV.039) -0.previous five years Real GDP per capita R^2 able IV.5. inward stock GDP.675 (3010.604 Growth in real GDP .A.472 Figures in parentheses are standard errors * *** Significant at 10 % level Significant at 1% level 1985 0.4.0209) 24.488) 0.594 (0.940) 0.879 (2. gr o wth in real GDP.0510*** (0. while a consistently positive influence.3 have been recalculated for developing countries alone.0519*** (0.0140) 11.049 (0.1279*** (0.382) 0.452 1995 0. Therefore the equations of table IV.A.307) 0. inward stock GDP.A. where the range of the variables may be much smaller.416) 2097. developing de veloping countries 1980 Nominal GDP 0. the equations provide evidence that an institutional characteristic of a host country has a positive influence on inward FDI.5. and political stability developing de veloping countries 1980 Nominal GDP 0.737* (0.471 Figures in parentheses are standard errors * Significant at 10 % level ** Significant at 5% level *** Significant at 1% level 1985 0.

inward flow GDP.current five years Real GDP per capita Residuals R^2 able IV.281) 0.0149) -670 (4. significant in only one period.284 1985-1990 0.A. de veloping countries 1980-1985 Nominal GDP 0. Regression of nominal inward stoc k of FDI on nominal GDP.262) 833 (665) 0.0148) 627 (4. gro GDP.370) 0.6).497 1990-1995 0. real GDP stability.196) -285 (1. growth in real GDP. de veloping countries 1980-1985 Nominal GDP 0. and residuals fr om inward stock developing inwar d FDI stoc k equations.A.417) 0. current gro wth in real GDP.567*** (0.213*** (0.Chapter IV The residuals from the equations of table IV.076) 0.372) 1.A.0404** (0. Political stability (table IV. Tab le IV.940*** (0.7.378 (5.415* (0.A.7.A.A.0431*** (0.585 Growth in real GDP .254) 0. and residuals fr om inward FDI stoc k equations and political stability.0860*** (0.579*** (0. the growth in real GDP during the period.180) 0.003* (0.393 (0.249 (0. gro GDP.133) 0.249) 0.0857*** (0.598 Growth in real GDP .776) 0.4 are used. Regression of nominal inward flo w of FDI on nominal GDP. Market size is again the main influence. inward stock GDP.7) does not contribute to the explanation of the inflow of FDI to developing countries in the equations.0089) 7.180) 0.520) 0. and real per capita GDP which is only marginally significant. together with initial nominal GDP.0184** (0.795*** (2. able IV.A.0090) 6.078) 687 (447) 0. from current gr o wth in real GDP.159) 0.225 (0.0148) 1.0216*** (0.6.516 1990-1995 0.553*** (0.0151) 992 (6. and the initial per capita income.6.179* (0. real GDP per capita.current five years Real GDP per capita Residuals Political stability R^2 Figures in parentheses are standard errors * *** Significant at 10 % level Significant at 1% level 139 . developing from inward stock per capita. It is followed by the residual significant in two periods.179*** (2. Tab le IV.703) 0.206) 0.272 Figures in parentheses are standard errors ** *** Significant at 5% level Significant at 1% level 1985-1990 0. to explain the inflow of FDI to developing countries (table IV.339 (0.997) 0.

while strongly significant. 1995. however. Source : UNCTAD. although they explain less of the variation across countries in more recent years than in earlier periods. seems to be of some influence among developing countries. the institutional variables included in this exercise are not the explanation. not tested here. The coefficient of the residual variable calculated from the inward investment stock equation. In developing countries. 140 . All in all. That contrasts with the situation for all countries. Whatever factors in the past caused some countries to receive more FDI than might have been expected on the basis of their market characteristics remain influential. national market variables do explain much of the variation in inward FDI attractiveness among countries. despite the fact that market variables explain a large part of the variance. becomes increasingly large over time for these developing countries. However. political stability. add to the explanation of inward FDI flows in these countries. It does not. the domestic market variables. would be existing membership in or recent adherence to a regional arrangement.Tr World Investment Report 1998: Trends and Determinants A conclusion to be drawn from the econometric analysis is that host country marketsize variables remain the dominant influence on inward FDI. in which more than half the variation is explained in all years. for the world as a whole. explain less than half the variance among countries in inward FDI stock except in the last year examined. representing favourable and unfavourable characteristics not identified here. One institutional variable. A candidate for further explanation. but the size and importance of the residuals and their predictive power is a challenge for further investigation. where it is positively related to a host country’s attractiveness as a location for FDI and in some periods adds to the explanation of the inward investment stock. for example the European Union or NAFTA.

the share of the United States in worldwide FDI rose to 23 per cent for inflows and 27 per cent for outflows. Their share of global outflows of FDI continued to exceed 80 per cent. the outflows substantially so (annex tables B.1) and the largest outward investors Canada and Switzerland (figure V. i. followed by the United States and Japan (annex tables B.1 and B. Inflows were 19 per cent higher than in 1996. outflows 53 per cent (figure V.2). whereas their share of inflows was significantly lower at 58 per cent. slightly less than the about 90 per cent for both in 1996. In terms of the regional and sectoral 141 .1 and V.2). however. a part of outward FDI is undertaken by foreign affiliates. Both outflows and inflows in 1997 were noticeably higher than in 1996. especially in the case of developed countries. with both of them very low for Japan (figure V. In terms of FDI stock as well.2).1).2). take into account that. these figures are net figures. reflecting the fact that firms not only invest abroad. but also divest (box V. As a result.4).2). Japan and the United States) accounted for 87 per cent of FDI flows into and 89 per cent of outflows from developed countries in 1997. A. the European Union was considerably ahead of the United States.1 For the developed countries as a whole. The Triad (the European Union.e. the largest developed country recipients of FDI in 1997 were Australia and Canada (figure V. United States In 1997. They do not.1 and B. again far exceeding inflows and outflows of any other country. Flows into South Africa remained low until 1996 but doubled in 1997.3). the United States reported $91 billion in FDI inflows and $115 billion in outflows. As always. is indirect FDI (box V.Chapter V CHAPTER V DEVELOPED COUNTRIES Developed countries sent $359 billion abroad in foreign direct investment (FDI) in 1997 and received $233 billion in FDI in turn. Outside the Triad. FDI as a percentage of gross fixed capital formation is considerably higher for outflows than inflows. The European Union led the Triad in both FDI outflows and inflows. Both amounts set new records (figures V.

the share of divestment in gross FDI outflows varies as well.2.. and changes in the regulatory environment. divestments accounted for from 25 per cent of total Portuguese FDI to more than 70 per cent of Spanish gross investments in 1995 (box table 1). De veloped countries: FDI outflo ws. (For an illustrative list of reasons for divestment. Figure V. including the divestment of assets located abroad. based on a survey of Japanese firms. restructuring and downsizing in order to increase the efficiency of their corporate systems as a whole. Currently. the following observations may be pertinent: /. for example. De veloped countries: FDI inflo ws.1. see annex table A. Figure V.1. FDI/TNC database. 142 . overinvestment. 1996 and 1997 a (Billions of dollars) Source : UNCTAD. FDI/TNC database. Box V. 1996 and 1997 a (Billions of dollars) Developed outflows.the United Kingdom and the United States -indicate that this share has fluctuated between 12 and 40 per cent for the former and between 14 and 66 per cent for the latter (box table 2). a Source : UNCTAD. Divestment Although FDI represents investment made with a view towards a lasting interest in. mismanagement.Tr World Investment Report 1998: Trends and Determinants Developed inflows. V..V. and control of.1. As the amount of divestment (like that of investment) fluctuates from year to year.1) It is worth noting. divestment of foreign assets by firms engaged in FDI also takes place quite frequently. While it is difficult to discern any trend. that TNCs may withdraw even when foreign affiliates are successful. splitting off non-core activities through divestments. however. enterprises located in countries other than the home countries of TNCs. a Ranked on the basis of magnitude of 1997 FDI inflows. a According to data for the countries that report statistics on divestment by foreign investors separately. Data for the two largest outward-investor countries -. firms are generally moving towards consolidating their main activities around core competencies. Reasons for divestment unrelated to corporate restructuring include decreased demand. broader corporate strategy of reorganization. Ranked on the basis of magnitude of 1997 FDI outflows. as part of a deliberate.

the more likely it is that divestments will occur..1. drive uncompetitive firms from markets. a Ranked on the basis of magnitude of 1997 FDI intflows as a percentage of gross fixed capital formation. (Box continued) (Box V. A typical example concerns Japanese affiliates in the United States. A high level of competition can lead to low levels of profit and. b /.a highly competitive market in many industries. Large Japanese investments made there in the latter half of the 1980s were not always successful and were therefore liquidated. FDI/TNC database. contin ued) • The higher the FDI flows or the number of firms investing in a country. De veloped countries: FDI flo ws as a per centa g e of gr oss fix ed capital f ormation. 1998). more generally. The divestment ratio for FDI is thus unsurprisingly high in the United States -. In fact.3. the greater the likely amount of divestment in absolute value.. the United States accounted for 30 per cent of the accumulated number of Japanese affiliates closed during the past 40 years (Toyo Keizai. • 143 . The more competitive markets are. 1994-1996 Source : UNCTAD.Chapter V Developed flows percenta centag gross fixed Figure V.

1 5.3 1.5 76.2 17. (Net) FDI flows plus divestment.1 76. Singapore.0 44.. China.1 13.2 17. Data cover only the Russian Federation.6 20. Republic of Korea.1 .1 25. Includes also Japan and developed countries in the Pacific.0 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1 1 1 2 3 3 3 3 3 4 5 3 8 Source : a UNCTAD. contin ued) Box table 1. Data are for Argentina.3 33.7 48. based on FDI/TNC database.4 United States 25..2 37.7 45.3 56.2 0.9 j 15 k 73 Por tugal a 28. Includes also Central and Eastern Europe. Divestment as percentage of gross FDI abroad.6 40.6 20. 1996 (Percentage) Home countr y Spain a United Kingdom 72. by selected home countries. Panama and Netherlands Antilles only.9 4.3 . Hong Kong.2 Host region/countr y Developed countries Europe North America United States Developing countries Africa Latin America and the Caribbean South.7 3.4 13.1.4 e 63. Mexico.8 28 48.3 49..6 .2 8.. Gr oss FDI a and divestment in the United Kingdom and the United States.0 21.Tr World Investment Report 1998: Trends and Determinants (Box continued) (Box V.2 d 24.2 31.1 3.2 73. East and South-East Asia West Asia Central and Eastern Europe World France 76. Data are for China. Data cover only Saudi Arabia. Box table Gross Box tab le 2.8 30. Not including Japan and developed countries in the Pacific.9 19.9 b 80.3 i .5 38. Data cover only Canada.3 40.3 28.4 f . 11.3 . based on FDI/TNC database.8 15. 144 .2 . 12. Brazil.4 h 27.6 c 12.. and Thailand.3 3.5 0...3 21.8 20. 40.3 72.4 13.9 21.1 20.9 g 19. /. . 17 Source : a b c d e f g h i j k UNCTAD. 1.6 22.3 12.. Data are for 1995. by host region.2 United States Gross FDI Divestment (Millions of dollars) 19 26 24 23 40 27 54 51 45 52 89 86 121 103 861 773 196 511 120 047 148 109 991 724 610 242 983 091 13 15 11 4 9 10 23 16 13 11 12 17 36 17 166 186 034 832 075 829 981 998 295 137 363 970 868 531 Divestment as percentage of gross FDI 66. 1983-1996 (Millions of pounds and dollars and percentages) United Kingdom Year Gross FDI Divestment (Millions of pounds) 3 5 8 11 19 20 21 10 9 10 17 21 27 22 498 814 625 798 159 916 491 108 304 107 358 040 604 014 665 226 754 460 637 323 479 180 554 747 490 563 679 855 Divestment as percentage of gross FDI 19.9 16..6 72.4 64.9 26. 16. Data are for the European Union. Data are for OECD countries. 76 116.5 25..

doc.1. which had more than a tenth of its gross FDI in tax havens.bea.. for example. Divestment by an individual company does not necessarily imply that the operations of the foreign affiliate are in an unhealthy state. does not indicate how much new investment is made and how much divestment takes place. China. this attracted foreign firms. Department of Commerce. conc luded) • FDI in tax havens or FDI made in response to incentives is particularly vulnerable to divestment. an indirect flow of FDI from the parent firm’s home country (and a direct flow of FDI from the country in which the affiliate is located). 145 . Firms based in Taiwan Province of China. the parent company payables to the affiliates tend to expand with the growth of trade between them. the Balance of Payments Manual of the IMF and the OECD’s benchmark definition of /. In contrast. signifying that the resulting asset-stock is owned by the parent firm via the foreign affiliate. If countries have a large share of their outward FDI in tax havens. • Taxation and embargoes are among the country-specific factors that might induce indirect FDI. Increases in parent company payables to foreign affiliates are also counted as divestment. • Reported FDI. a Whether indirect FDI occurs or not depends on factors related to home and host country policies as well as on factors related to firms’ strategies and behaviour. among other things. “U. Although this is based on balance-of-payments accounting and is different from other reasons in nature. FDI by a foreign affiliate is indirect FDI. 1996a). for example. Indirect FDI The sources of FDI are not only parent TNCs -. nearly half of the Japanese affiliates located in Singapore have affiliates in other countries in the region (UNCTAD. invest in China via their affiliates in Hong Kong. 1996) and IMF (IMF. For example. divestment can become large relative to gross outward FDI. if only Spanish investment in tax havens is considered. Mauritius had concluded a double-taxation treaty with India in 1982. para. Spain. first quarter 1998". Firm-related factors conducive to indirect FDI include the type of division of labour that exists within corporate networks. international transactions. b c d V. The profitability of foreign affiliates in the United States is relatively low: in 1995.Chapter V (Box concluded) (Box V. However. the ratio of net income to sales was a meagre 1 per cent for foreign affiliates (United States. Investments in financial intermediaries in tax havens. the IMF recommends not including such investment in FDI statistics (IMF. to establish holding companies in Mauritius to invest in India. divested itself of more than 70 per cent of it in 1996 (box table 1). 1993. whether inward or outward. can give a certain degree of autonomy to foreign affiliates vis-à-vis their parent firms. c _____________ a Reported FDI. b Similarly. from the Web site of United States. such as the Netherlands Antilles. for example. large or sustained divestments can signal to host countries that they are no longer attractive locations for foreign firms. United States affiliates abroad earned 5. this ratio was 2.2. an investment embargo by one country on another may induce TNCs to invest in the latter economy via a third economy that is not affected by the embargo. OECD (OECD. there are not many countries that report these elements of FDI separately. Serving as a conduit for this indirect FDI.companies that own and operate affiliates abroad -. See. therefore. In the ASEAN region. In the case of investments of a non-permanent nature. being a net figure.S. Department of Commerce. Ministry of International Trade and Industry. In fact. is supposed to include such investments by definition. Regional headquarters. 1997a).htm). low ones may disguise divestment. Department of Commerce. especially those owned by non-resident Indians. This is reflected in FDI statistics which normally report flows on a net basis. 18 June 1998.but their foreign affiliates as well. Bureau of Economic Analysis (www..gov/bea/newsrel/trans198. 1993) recommend that countries report gross investment. are typically a transient feature of a country’s outward FDI. may be able to make their own decisions as regards undertaking FDI.6 per cent in 1995 (Japan. 365).4 per cent by way of profits (United States. in Japan. 1998b). If a foreign affiliate is established in order to supply the parent company with goods and services. Box V. Such divestment generally takes the form of withdrawals of intra-company loans. and that it represents. which. BEA New Release . it should be noted that this type of transaction is recorded as divestment as well. d High net figures may disguise reinvested earnings. divestment was much higher than new investment. as exemplified by United States FDI in these locations. 1997b). however. Mauritius has become one of the largest FDI sources for India.2. divestment and net investment (gross investment less disinvestment) separately.

had one billion dollars’ worth of assets in the United States in 1995. .2). the same applies to strategic alliances many of which are made by affiliates and not recorded for the parent firm. but a reassessment of Brazilian foreign assets on the basis of data on inward FDI in the United States by Box table 1.. However.where affiliates play an important role -. because the definition of FDI for balance-of-payments purposes is based on the location rather than on the ownership of the investing enterprise.the percentage of indirect FDI is relatively high. . ..Tr World Investment Report 1998: Trends and Determinants V... China Switzerland 1996 United States 1992 Item Share of the number of parent firms accounted for by foreign affiliates Share of the number of foreign affiliates accounted for by foreign affiliates Share of outward FDI stock accounted for by foreign affiliates Share of outward FDI flows accounted for by foreign affiliates Share of foreign sales accounted for by foreign affiliates Share of foreign employment accounted for by foreign affiliates 1987 1993 Singapore 26 28 29 ..... Indirect FDI from selected countries.. Share of foreign assets. and hence the magnitude of the share of the ultimate home country as compared with the immediate home country from which the investment is made. for example. 4b 16 15 19 . OECD. 30 c .. but $8 billion of this amount was held. 1997d. . . Estimates (not for a par ticular year).. based on unpublished data provided by Statistics Canada. .. reflecting the domestic orientation of the operations of foreign firms in the United States. . by other countries (annex table A. see annex table A. for example. United States affiliates of firms based in Brazil... According to data for some countries.2. 146 . . . For Canada and Switzerland e as well as Hong Kong (China) and Singapore -.V. by firms based in the Netherlands Antilles were worth $11 billion in 1995. .. the importance of indirect FDI relative to total outward FDI varies among countries (box table 1). 50 c . 17 a . is difficult and possible only for selected countries (e.. and UNCTAD. d The inclusion of indirect FDI in the outward FDI of countries hosting foreign affiliates engaged in FDI obscures the actual volume of FDI made by nationally-owned firms of those countries. Austria. assets in the United States owned. ... In contrast. . .. (IMF. ... 1993... FDI made by financial and holding companies in which the majority share is owned by foreign firms.. continued) FDI include investment by foreign affiliates in the definition and advise governments to include it in their FDI data. Tracing the ultimate beneficial owner. United States. accounting for one-fifth to one-half of outward FDI. such an investment is typically not recorded in the statistics of the home country of the ultimate parent firm. 1996)..g.V. . (Interestingly. 20 21 21 . (Box V. . various years (Percentage) Canada 1990 Hong Kong. 4 Source : a b c UNCTAD.. According to United States data (the only data available on ultimate ownership). FDI originating in tax-haven economies is mostly undertaken by foreign affiliates. . ultimately.3). Depar tment of Commerce. .2. the investment (an indirect investment by the affiliate’s parent firm) is recorded as outward FDI from that economy.) Information distinguishing FDI made by nationally-owned firms from that made by foreign affiliates located in a given country is also limited. . ... c When it comes to a country that hosts a foreign affiliate engaged in FDI. the foreign assets of developing country TNCs can be underestimated. 3 . On the other hand. FDI by foreign affiliates located in the United States accounts for a small percentage of total United States outward FDI.. /.

1). In any event. the advantages underlying indirect FDI may be erroneously attributed to the immediate home country’s firms. Japan’s share also declined. as a matter of principle. paragraph 362). “Statistics . TNCs that undertake FDI from one of their host countries may do so because they regard that country as a strategic location for their regional or global operations. As far as the host countries are concerned.Chapter V structure of United States FDI inflows and outflows. while the IMF stipulates “Direct investment enterprises comprise . and their corporate networks become more and more complex. the European Union continued to be the most important investment partner of the United States.. In both inflows and outflows.3).7 billion (annex table A. also emerging as a not unimportant source of United States FDI inflows (10 per cent). the larger the share of indirect FDI by other countries’ TNCs in a country’s overall outward FDI. 1993. either directly or indirectly owned by the direct investor” (IMF. (Box V. Switzerland invested heavily in the United States in 1997: inflows from that country more than doubled. It accounted for about one-fifth of total approved FDI inflows into India in 1997 (UNCTAD. 1996. associates .3 billion. subsidiaries .V. However. FDI/TNC database). Still. At the end of 1996 foreign financial and holding companies in Switzerland held outward FDI stock worth Sfr 33 billion.1): • For both inflows and outflows. They are..depending on their degree of specialization and competence within a TNC network -. Mauritius has been the second largest investor in India.. Developing countries continued to attract about one-third of United States FDI outflows (table V. However. after the United States. is likely to invest in the United States directly.. That region’s share in United States FDI outflows amounted to one-fifth of the total.. but this is a trend dating back to the beginning of the 1990s.might also enrich the existing ownership advantages of their corporate systems by adding advantages that have been locally developed. foreign affiliates -. it may be important for them to monitor the volume and direction of indirect FDI because it may provide them with a better understanding of their own advantages for outward FDI: to the extent that outward FDI is determined by ownership advantages.6 billion). the European Union’s share (and notably Germany’s share) in inflows declined markedly in 1997. paragraph 15). _______________ a b c d e As far as the host country is concerned. This pattern of investing in the United States through foreign affiliates in intermediate countries is not much followed by developed country firms. Of course.. On the other hand. should. the second largest investor industry after insurance (Sfr 40 billion).7 billion) and the Netherlands ($10. the biggest investors in the United States in 1997 were Germany ($10. as TNCs operate more and more globally.3 billion)... since 1995. the non-recognition of indirect FDI could lead to an overestimation of the competitiveness of a country’s firms in international markets and this may detract from the need to consider policy measures to enhance competitiveness. the greater the uncertainty of the national competitiveness of outward FDI.7 billion) and the United Kingdom ($8. the same FDI represents foreign-controlled FDI.. the following developments stand out (table V. moreover.2. say. cover all enterprises in which the direct investor has directly or indirectly a direct investment interest” (OECD. concluded) Brazilian affiliates in other countries shows that assets of United States affiliates ultimately owned by investors from Brazil amounted to $8. and branches . This is especially so in the case of internationally owned TNCs and firms with diversified shareholdings.. But FDI flows into the United States from Latin America and • V. 147 . more than the level of FDI stock held by chemical and plastics firms (Sfr 30 billion). rivalling France ($8. investments by foreign affiliates will become more important. not through its affiliates elsewhere.. Latin America and the Caribbean were the dominant developing-region partner in 1997. A British firm. to $8. making further FDI possible.2. The policy implications of indirect FDI are complex. Thus.

However. Ranked on the basis of magnitude of growth of FDI inflows and inward stock. flows from offshore financial centres accounted for three-quarters of United States inflows originating from the Latin American region. 148 .2 • Investment inflows and outflows in manufacturing as a whole continued to decline significantly in relative importance.4. accounting for just over a quarter of overall FDI outflows and 40 per cent of FDI inflows in 1997 (table V. FDI/TNC database. Netherlands. 1996-1997 a (Percentage) Source : a UNCTAD. Switzerland and the United Kingdom in 1997. Finance and insurance Developed gro Figure V. Germany. De veloped countries: gr o wth of FDI.1).Tr World Investment Report 1998: Trends and Determinants the Caribbean were not much larger than those from many developed countries such as France.

3 2.0 42.8 6.3 53. updated on 18 June and 19 June 1998) and information provided by this office.8 1.6 4. based on data obtained from the United States.9 13. 96..7 2.9 49.8 81.0 6. The composition of FDI by mode of financing reveals considerable volatility over time.3 0. Includes developing Europe.9 1.8 0.7 34. 89. of which (percentage): Equity capital Reinvested earnings Intra-company loans 1995 58..2 0.4 3.6 48.2 3.2 13.1 11.4 2.9 39.5 39.8 7.0 16.3 By industry (percentage): Petroleum Manufacturing Distributive trade a Finance and insurance b c Other industries 6.5 0.0 2.4 46.6 45.7 1997 114. . 1995-1997 Inflows 1996 76.1 10. United States: FDI inwar d and outward flo ws.0 18. .1 17.4 13.8 0.3 1. finance and insurance includes real estate.6 3.5 0.2 59.4 25.4 10. Bureau of Economic Analysis webpage (www.bea.7 43..5 9.4 10. followed by chemicals and wholesale trade.8 7.2 13.1 44.4 34.8 33.0 0.Chapter V was the dominant industry in outflows (accounting for 42 per cent of the total).6 32.5 64.2 21. includes also Central and Eastern Europe.6 1.9 Item Total.0 6.5 -0. For outflows.9 8. distributive trade includes only wholesale trade (excludes retail trade).3 9.0 65.5 72.0 9. For inflows.2 10.3 4.1 14.3 0.9 .1 16. Includes the Pacific.1 1.5 16. totals do not necessarily add up to 100 per cent due to investments in international affiliates that are not classified under specific countries.8 10.3 1. Tab le V.0 9..7 11.5 10.8 19.0 28.. Department of Commerce.7 .2 4..0 3.4 55.7 4.8 62..0 .0 10.2 13.6 25.8 9.3 2.8 26.7 -0.9 13.7 48.1. For outflows.5 26.7 51.4 1.9 -0. in billions of dollars.0 51.doc.2 6.2 16.1 62.3 4. Finance and insurance includes depositar y institutions.9 24.0 4.9 0.9 1995 92.1 6.9 17.6 7. There are two major able inward outward flows. For outflows.7 4.4 Outflows 1996 74.8 1.4 2. .1 1.gov.8 10.7 10. Equity capital continued to be the most important component of inflows to the United States in 1997.5 1997 90.8 33.3 6. 75.3 Source : a b c d e f UNCTAD.7 21.6 By country/region (percentage): d Developed countries Canada European Union Other Western Europe e of which: Switzerland Other developed countries of which: Japan Developing countries Africa Latin America and the Caribbean West Asia South.8 9.3 20.1 -0. and was strikingly different for inflows and outflows.3 finance and insurance was also the dominant industry in inflows.1 4. East and South-East Asia f of which: China Central and Eastern Europe 92.7 -0.1 14.9 4. 149 .3 17.

4 per cent versus 4. the share of equity capital in total flows into the United States decreased from about three quarters in 1995-1996 to about a half in 1997. The World Economic Forum’s competitiveness index. Among major investors in the United States. the attractiveness of the United States as a location for FDI does not derive only from its large and growing market. In addition. although lower than those of five developing economies (Hong Kong. overall M&A activity (some of which took the form of acquisition of equity of United States firms by foreign companies) was at record levels in 1997. However. equity capital inflows also reflected considerable funding provided by foreign companies to their existing United States affiliates to expand operations in the buoyant United States economy.8 per cent in 1997 exceeded growth in the preceding years. Persistent economic growth in the United States provided a strong stimulus to FDI inflows. The economy expanded for the sixth year in a row. 1998). intra-company debt played a marginal role in FDI outflows of the United States. as identified by the World Economic Forum. the share of intra-company debt nearly doubled. 150 . only Germany reported slightly higher lending rates. to 27 per cent (table V. down from two-thirds the year before. China. Prime lending rates in 1997 were about 2 percentage points lower in France.5 per cent). However. Low interest rates in European Union countries may have induced loan financing of FDI in the United States. which is based on various indicators and investors’ perceptions. High corporate profitability in the United States in general went along with improved profitability of foreign affiliates located in the country. providing a favourable environment for profitable operations.Tr World Investment Report 1998: Trends and Determinants reasons for this prominence. This may have contributed to the emergence of Switzerland as an important investor in the United States in 1997. Consistent with this reasoning. Equity capital was the driving force of FDI outflows in 1997. portrays the United States as one of the most attractive investment locations. Second. China outperformed the United States. 1998). significant transactions were concentrated in finance and in utilities (electric power and telecommunications) in response to new market opportunities provided by privatizations of state-owned firms in this field (Bach. Major competitive strengths of the United States. United States companies acquired some large foreign businesses. the United States received the highest index value in 1997. many of which reinvested a higher share of their earnings in the United States. One-half of FDI from the United States was accounted for by reinvested earnings in 1997. various structural characteristics of the economy underlie its locational advantages. Among industrial countries. 1998a). Real GDP growth of 3.1). This exceptionally high share can be attributed to large loans by European financial institutions to their finance affiliates located in the United States (Bach. among the complete sample of 53 countries under consideration. The United States also received a favourable ranking. The difference in lending rates was most pronounced between the United States and Switzerland (8. only Singapore and Hong Kong. the Netherlands and the United Kingdom than in the United States (IMF. First. Correspondingly. include the following (WEF. 1997): • Labour markets are much more flexible than in major European economies (except the United Kingdom) and Japan.

table 4.Chapter V Indonesia. the sophistication of financial markets is considered more advanced in the United States than in any other country except the United Kingdom (WEF.08 per 1990 and 1995 a cent to 0. the Czech Republic and Luxembourg. the United States received $34 billion in royalties and licence fees. The service sector.20). and Taiwan Province of China). Majority-owned foreign affiliates only. table 7. with regard to productivity-adjusted wage costs (WEF.9 3. • The United States is the frontrunner with respect to technological innovations.400 in 1990. the United States tops the list of all countries under consideration with regard to the quality of scientific research institutions and competitive advantages stemming from indigenous innovation. appears to be most developed in the United States.5 3.01) and overall infrastructure is assessed to be superior only in three countries: Singapore. R&D expenditure per employee in the United States affiliates of foreign-based TNCs amounted to $3. Technological leadership is also reflected in the pattern of royalties and licence fees (Bach. Non-bank affiliates/non-bank parent companies. the R&D intensity (measured by the share of R&D expenditures in total sales) of United States affiliates of foreign-based TNCs increased from 0. For foreign able expenditure Tab le V.4 1. compared with payments of just $9 billion. 1997. with just four countries showing an even higher ratio.600 in 1995.1 per cent to 1. (Thousands of dollars) Department of Commerce. R&D employ foreign emplo y ee in f oreign affiliates and parent firms. p. 1997. Between 1990 and 1995.2 5.200).2 Source: a b United States.01). Germany and Switzerland (WEF. 1993a. More specifically. compared with $2. 1997a). with one-third of outflows being directed towards developing Affiliates of foreign-based TNCs in the United States Foreign affiliates of United States TNCs b United States parent companies 2.2).1 per cent. The same applies to marketing skills on which foreign investors may draw. which contributed to the further transnationalization of United States companies in 1997. 1993b. Singapore.6 2. but greater than the figure for their foreign affiliates ($2.5 per cent of United States GDP in 1995. table 3.2. 1993b. China. Item 1990 1995 1997a and 1997b). intensity decreased somewhat from 0. The United States has benefited from globalization not only by way of FDI inflows but also by way of FDI outflows. • • All this implies that the United States is well prepared to benefit from inward FDI. with its share in GDP accounting for 72 per cent in 1995.200) (table V. 1997. Moreover. 1997. Depar tment of Commerce. Spending on R&D amounted to 2. 79). In 1997.07 per cent (United States. United States: R&D e xpenditure per affiliates of United States TNCs. which is attracting an increasing share of FDI worldwide. 151 . compared with an average of 66 per cent for all high-income economies (World Bank. 1998. 1997a and 1997b. This is exemplified by the extent to which the United States benefits from the transnationalization of R&D activities. 1993a. table 6.01). The 1995 R&D expenditure per employee was less than the corresponding figure for United States parent companies ($5. The quality of management in the United States is superior to all other countries surveyed (WEF.

it is striking that the increase in the outward FDI stock/GDP ratio since 1980 has been relatively small for the United States. 1996 a Kingdom.1). the United States does not appear to be leading the way towards globalized production. De veloped countries: FDI stoc k as a per centa g e of GDP. This “large-country” bias (shared also by Japan -. 152 . Those ratios remain significantly higher for these two countries even if FDI stocks held in other European Union countries are netted out: in 1995. FDI/TNC database. To a large extent. the share of developing countries in total German FDI outflows was just 11 per cent in 1997. Figure V.Tr World Investment Report 1998: Trends and Determinants countries (table V.5). compared to Source : UNCTAD. The intensity with which United States companies are engaged in the international division of labour between developed and developing countries is in striking contrast to that of European companies. the adjusted outward FDI stock/GDP ratio is about twice as high as the ratio for the United States.5. while still locating the largest share of their international production in developed countries.5). Consequently.see section C) renders it rather unlikely for the United States to approximate the ratios for countries such as the Netherlands and the United Developed stock percenta centag GDP. For example. the outward FDI stock of the United States is considerably smaller as a percentage of United States GDP (some 10 per cent) than the ratio of outward FDI stock to GDP of most other industrial countries (figure V. Outward orientation by means of FDI has remained fairly limited so far: despite the large and growing outflows. FDI outward stocks outside the European Union accounted for about 50 per cent and 64 per cent respectively of the total outward FDI stocks of the Netherlands and the United K i n g d o m ( E U R O S TAT. Yet. Furthermore.3). this may be the case because large economies are typically less transnationalized than smaller ones. 1998a). This suggests that United States firms. as an economy. even after some increases. the world as a whole. a Ranked on the basis of magnitude of FDI inward stock as a percentage of GDP. which reveal particularly high ratios of outward FDI stock to GDP (figure V. have increasingly made use of the locational advantages of developing countries. the same applies to FDI outflows as a percentage of gross fixed capital formation (figure V.

however. Finally. It fits into this picture that the share of intra-firm trade in total United States exports and imports of goods has changed little over the past two decades (Zeile. p. Sweden and the United Kingdom (figure V. But when outflows are related to gross fixed capital formation. This is because of the size and in particular the large internal market of the country. p. global sourcing majority-owned foreign affiliates. it was Sweden that attracted the highest FDI inflows within Western Europe as a whole during 1994-1996. contrary to what might be concluded from the sheer size of the country’s FDI abroad. Western Europe The countries of Western Europe received $115 billion in FDI in 1997 and sent $196 billion abroad.Chapter V The notion that the United States is not as globalized in terms of international production as other countries with lower (and sometimes much lower) outward FDI stock is supported by the persistently strong concentration of TNC activities and resources in parent companies within the United States. For example. Source: Mataloni. 23).7 Capital expenditures 80. and United States.3.8 76. 45. which accounted for 94 per cent of the region’s inflows and 92 per cent of its outflows. was still limited in the mid-1990s: only 6 per cent of the value of United States parent companies' output was accounted for by inputs purchased from abroad. accounting for 6 per cent of Western Europe’s outflows in 1997 (figure V. As a percentage of gross fixed capital formation. United States: share of parent companies in TNCs).1). Switzerland was the largest investor among the non-European Union countries of Western Europe. 46. followed by Belgium and 153 .8 75. because of the integrated nature of its economy.2). foreign sales and foreign employment indicates that the concentration of TNC activities at home was stronger for United States TNCs than for TNCs based in the European Union: the average transnationalization index of the top 100 TNCs for 1996 was 65 for the European Union (41 TNCs) and 43 for the United States (28 able Tab le V. the contribution of parent United States TNCs. Not surprisingly. of gross product (value added). p. emplo yment and capital e xpenditures of However. A cross-country comparison of foreign assets. 1997. 1997. 1997.3). the absence of barriers to competition and the maintenance of high levels of consumption. Switzerland ranked fourth.6 which accounted for 88 per cent of Employment 78. In terms of absolute inflows. behind the Netherlands. but also. France and Belgium and Luxembourg were the most important recipients among European Union countries in 1997 (figure V. R&D expenditures were concentrated Item 1982 1995 even more strongly in parent companies. as data for other affiliates are largely missing. United States parent companies accounted for about three-quarters. 1985). employment expenditures gr oss product. Gross product 78. capital expenditures and employment of United States TNCs (United States parent companies and their majority-owned foreign affiliates combined) in 1995 (table V.1 74. and majority-owned foreign affiliates for about onequarter. the United Kingdom. a 1982 and 1995 companies in the United States to overall (Percentage) TNC activities has declined modestly since 1982. gross product.3). Totals refer to data for parent companies plus Commerce. (See chapter II for further details). both inflows and outflows were dominated by the European Union. 4 All this reflects that firms in the United States. are under less pressure to internationalize than firms in other developed countries. Department of a Non-bank TNCs. in the region. Western B. and perhaps more importantly.4 worldwide R&D (93 per cent in 1982) by United States TNCs (Mataloni.

Eur opean Union. in the 1997 competitiveness index of the World Economic Forum (1997) and were placed in the bottom half of the group of 53 countries surveyed. as might the 1997 appreciation of the dollar by about 10 per cent in nominal terms against the ECU (IMF. 1998a) and the Source : UNCTAD. In addition. and Ireland (figure V. 1985-1997 with the European Union as the single (Billions of dollars) most important investment recipient (figure V. Likewise. Exchangerate developments might have been expected to provide an incentive to FDI inflows into the European Union. 1997 and 1998b. the United States is catching up inflows.6 billion). the level was still lower than in 1995.6). This is consistent with foreign investors’ approval of the country’s economic policies. the United Kingdom received substantially increased FDI inflows.5). its share in overall European Union inflows rose from 28 per cent in 1996 to 34 per cent in 1997. The importance of FDI stock relative to GDP is higher in both inward and outward FDI stock for non-European-Union countries than for European Union members. This again reflects the smaller size of these countries and the fact that the pressures to internationalize production. With dramatic increases in flows into the United States in recent Figure V. Austria (by $ 2. The 1997 performance of the European Union as a group in attracting FDI conceals strikingly different developments in individual countries (figure V.3). was highest in Belgium and Luxembourg in 1996. In sharp contrast. including labour-market reforms. the United Kingdom ranked at the top of all European • 154 . developments in Europe in 1997 were country-specific. Although the growth of flows into the European Union was substantial in 1997 after negative growth in 1996. United States FDI inflo ws. the inward FDI stock. the United States emerges as the principal recipient of FDI during most of the years from 1980 to 1996 (figure V. whether for accessing markets. FDI/TNC database.1 billion) and Belgium and Luxembourg (by $ 1. stability of the nominal exchange rate of a Intra-European Union investment was estimated by using the share of the ECU against the yen. obtaining resources or enhancing efficiency. intra-European Union and European intra-European years.6. if intraEuropean Union FDI is netted out.6).Tr World Investment Report 1998: Trends and Determinants Luxembourg.4): • Inflows declined most notably in France (by $ 3. services and factors of production enjoyed by European Union member country firms. this seems to be related to perceptions of foreign investors as regards these countries’ locational attractiveness: they were downgraded by 6 and 8 ranks.7 billion). are greater for firms in those countries that do not have the same access to the large European markets for goods. followed by the Netherlands and Ireland (figure V. respectively. relative to GDP. According to the World Economic Forum (1997). All of this the European Union in the total European Union investment provided in suggests that the major factors in FDI EUROSTAT. Especially in the cases of Belgium and Austria.

underscore earlier findings according to which the effects of deepening integration on the intra-European Union distribution of FDI inflows are ambiguous. since 1993. FDI flows among the member states of the European Union have lost some of their importance. Moreover. The European Union as a whole also remained the most important outward investor in 1997. and the decision of the Government not to participate in the European Monetary Union. and finance continue to be the dominant FDI recipients. in 1997. Switzerland and Japan. FDI flows into Ireland increased in line with an improving competitiveness record revealed in surveys and a high GDP growth of 8. In 1985-1990. 1997a). or instead (or also) improves the chances of peripheral countries to catch up with core countries.3 per cent in 1997 (three times higher than GDP growth for the European Union as a whole). 3. real estate. The United States.6 per cent. the 155 . Norway has become a large investor.7). the first time since 1989 that this had occurred. But Japanese FDI has been declining since 1995. e.g. There are some signs. after the announcement of the European Monetary Union.5 per cent versus 2. 1998b). European Union outflows had exceeded United States outflows by a factor of 3. exceeding United States FDI outflows by more than two-thirds (figure V. In 1996. both in the core countries of the European Union and on its periphery. • Developments were also diverse on the European Union’s periphery. France and the Netherlands (figure V. The United Kingdom maintained its position as the most important European Union investor abroad. Instead. Spain received less than half the FDI inflows it had received during the peak years of 1990-1992. some other European Union countries reported steeply rising FDI outflows (particularly Spain and Italy). The diverging trends of FDI inflows. that intraregional FDI is again on the rise.4). Among these major investors. depends critically on locational attractiveness of these countries (chapter IV. In the service sector. The gap in outflows between the European Union and the United States has narrowed since the 1980s.2). At the same time. business services. In 1995.D. These factors seem to have dominated two potentially depressing effects on inward FDI: the appreciation of the British pound vis-à-vis the ECU in 1997. FDI outflows from the European Union to the rest of the world were about the same as those within the European Union (EUROSTAT. Whether increased integration leads to a concentration of FDI in core countries.6. outflows from Germany and the United Kingdom increased in 1997.7 (UNCTAD.5 However. high FDI inflows may also reflect competitive weaknesses of individual United Kingdom companies. in the automobile industry. This could reflect the tapering off of the effects of economic integration. this factor was 1. 1998b). when Spain seemed to have benefited a great deal from corporate restructuring in anticipation of the single European market. At the same time. the United Kingdom’s growth rate (70 per cent) was particularly dramatic (figure V. however. Much of inward FDI from outside the European Union comes from the United States.Chapter V Union countries in this respect.2). which rendered them vulnerable to takeovers and mergers. the most recent year for which data are available. Switzerland and Norway together accounted for more than 90 per cent of inward FDI flows from outside the European Union in 1996. FDI inflows in manufacturing were almost on a par with those in services (EUROSTAT. The United Kingdom also performed better than the European Union as a whole in GDP growth in 1997. followed by Germany. Most notably.

slightly higher for outflows to Latin America (which doubled). The share for 1997 is based on UNCTAD estimates.Tr World Investment Report 1998: Trends and Determinants outward orientation of European Union investors has not even rivalled that of United States investors. Major attractions were services and manufacturing in the MERCOSUR area. Germany and the United Kingdom. if intra-European Union investment flows are netted out (figure V. The regional distribution of European Union FDI outflows provides further evidence in this respect: in comparison with Japan and the United States. 7 The German case is noteworthy: the share of developing countries in German FDI outflows rose from 6 per cent to 12 per cent between 1991 and 1997. 156 .7). 1996. United States FDI outflo ws. This suggests that globalizing through outward FDI beyond the Union’s boundaries has taken second place to regional networking and strategic positioning within the Union. Australia. According to an UNCTAD-ICC survey (chapter VII). intra-European Union and outflows. European Union. 1997 and 1998b. 1998). Canada and Japan). The presence of European investors increased. the European Union was the second most important source of FDI in Latin America (ECLAC. Switzerland. compared with 19 per cent each for Japanese and North American firms. Apart from the United States. European Union firms have traditionally accorded less importance to developing countries as locations for their outward investment (European Commission and UNCTAD. FDI/TNC database. and considerably higher for outflows to a European intra-European Figure V.8 over the three-year period. They can be expected to continue to catch up with other investors in Asia (UNCTAD-ICC. overall German FDI increased by a factor of 1. almost two-thirds of European Union outward FDI stock was held in just five industrial countries (in descending order: United States. provided the most important source of FDI inflows into Central and Eastern Europe. 20). In 1995. p. 1998).7. a Intra-European Union investment was estimated by using the share of the European Union in the total European Union investment provided in EUROSTAT. 1985-1997 (Billions of dollars) Source : UNCTAD. 34 per cent of the respondent firms from Europe said tha they would increase FDI in the short and medium term. especially from Spain.6 The strong concentration in industrialized countries has. Indications are that European Union TNCs are paying increasing attention to Asia. • • Data on FDI outflows from selected European Union member states also suggest an increasing orientation towards developing countries: the share of developing countries in total FDI outflows increased from 10 per cent in 1991 to 14 per cent in 1993 and to 17 per cent in 1996. declined somewhat: • FDI from European Union countries. notably from Germany and Austria.8 The increase was roughly of the same order for outflows to Central and Eastern Europe. Comparing average German outflows in 1996-1997 with average outflows in 1993-1994. however.

as a result. Average outflows during 1996-1997 were similar to those of France but lower than those of Hong Kong. The need to keep up 157 . The country’s outward stock of $285 billion accounted for 8 per cent of the world FDI stock. Flows into ASEAN countries plus China. This should have depressed FDI outflows as the international price competitiveness of producing in Japan and domestic liquidity was reduced but. they increased by 50 per cent to the Republic of Korea. With regard to FDI outflows to countries less affected by the financial crisis. With respect to outflows. Several factors help to explain this development. it seems that cyclical factors that should have had adverse effects on FDI outflows were overruled by longer-term strategic considerations.5). Comparing the periods 1986-1990 and 1991-1997. exchange-rate developments had an effect on Japanese FDI (UNCTAD. China dwindled in 1997 to one-fifth of the 1996 flows. FDI outflows have not been affected. therefore.11 Depressed demand conditions at home may have induced Japanese companies to invest abroad as foreign investment seemed more profitable than domestic investment. Taiwan Province of China. the country is returning to its normal pattern. Outflows from the latter have exceeded those from Japan every year since 1993. during which FDI outflows were inflated by the seemingly abundant liquidity in an overheated economy. in contrast. the highest growth in the 1990s). so far. outflows in 1997 point to an ambiguous effect of the Asian financial crisis: German FDI outflows to ASEAN countries declined by 17 per cent in 1997 from 1996. Interestingly. Japanese outflows were much smaller than those of almost all other developed countries (figure V. Relative to gross fixed capital formation. though in 1997 they were comparable (annex table B. outflows to Hong Kong. C.10 In addition. In January 1998.Chapter V group of developing economies in Asia. China. When fears of a protectionist “fortress Europe” proved to be unfounded. but for no more than 6 per cent of Japan’s GDP (figure V.9 In a sense. 1994a). Japan Japan ranked fourth (behind the United States. the increase of FDI outflows continued in 1997 at a rate of 11 per cent (23 per cent in yen terms. the incentive to undertake market-oriented investment projects in tradable goods in the European Union weakened. possibly resulting in a decline of the economy in 1998. outflows recovered in 1993-1996 when the yen appreciated in real terms. declined modestly in the case of Taiwan Province of China. although the yen had weakened considerably since 1996. Japan’s share in worldwide outflows was almost cut in half to 10 per cent. the United Kingdom and Germany) in outward FDI stock in 1997. though.12 More importantly. The decline of Japan’s importance as an investor country is mainly due to the burst of the “bubble” economy in the early 1990s.2). the real effective exchange rate was back to its low level of 1991 (IMF. However. nearly returning it to the level of the early 1980s. It should also be noted that the growth of FDI outflows in 1997 coincided with economic stagnation in Japan. For example. Japan’s relative importance has clearly declined.3). China. Hong Kong. 1998). Something similar is true of Japanese investment in Europe.7. the first time since 1974. Japanese outflows declined from a yearly average of $32 billion to an average of $22 billion. and exceeded the 1996 level in the case of China. and Republic of Korea increased by a factor of 2. which is expected to decline in manufacturing by 6 per cent in 1998.

The United States clearly represents the most important host country. too. Japanese companies can meet this need by building on existing foundations. of the outward stocks of the United States and the European Union (European Commission and UNCTAD. The need to adjust to global competition may also affect the sectoral structure of Japan’s FDI. ch. In fact. with the economic recovery and improved macroeconomic fundamentals in Latin America. absorbing 43 per cent of FDI outflows on a notification basis in 1991-1997. In the past. although slight increases in FDI from Japan were recently observed (UNCTAD. Japanese FDI flows to this region increased considerably on a notification basis. On the whole.6). respectively. compared with 6 per cent and 3 per cent. Apart from developing Asia. The shares accounted for by Latin America and Africa declined until recently.5).4). 1995a. table I. even among the prospective European Union members. which still absorbed one-quarter of Japanese FDI flows in 1997. developing Asia hosted 19 per cent of total Japanese outward FDI stocks. In particular. V). the transnationalization of Japanese TNCs has remained weak by the standards of other developed countries: • Japanese outward FDI stock in 1996 was low as a percentage of GDP. 1996a). 1996. Japanese TNCs may then attempt to further strengthen their presence in Europe and the United States. The need to do so will become even more pressing if the current wave of mergers and acquisitions involving companies in Europe and the United States continues. not only compared with most other developed countries but also with the South. (It accounts for roughly the same share of Japan’s outward FDI stock in 1997. however. a trend that is likely to continue. however.3). the very pattern of Japanese outward investment in Asia gave rise to the “flying geese” development paradigm (UNCTAD. Japanese FDI has remained marginal in Central and Eastern Europe. they ranked clearly below TNCs based in the European Union and in the United States (chapter II). East and South-East Asian countries (figure V. they have clearly been the frontrunners in drawing on the comparative advantages of neighbouring countries with lower per-capita income by investing in them. In 1997. • • All this suggests that Japanese investors still have some way to go to adjust to global competition. for instance. while firms from elsewhere seek access to the Japanese market. investment in the primary sector had become less and less important. the United States and Western Europe have traditionally figured high in Japanese FDI. and outflows to Mexico tripled (table V. As concerns the average transnationalization index of the Japanese firms in the top 100 TNCs. For example. The manufacturing sector.) By contrast.Tr World Investment Report 1998: Trends and Determinants with global competition through establishing increasingly international production systems figures prominently among these. FDI outflows as a percentage of gross fixed capital formation were even lower in Japan than in countries such as Portugal and Spain (figure V. In 1996. In 1985. lost slightly in importance 158 . outflows to Brazil increased by a half.

1 1.3 2.2 41.4 4.4 12.2 0.5 9.6 11.0 3.2 24. The total for the three sectors does not necessarily add up to 100 per cent because FDI made for the pur pose of establishing and expanding branches is not allocated to any of these sectors.0 15.9 4.8 36.2 7.3 Developing countries Africa e Latin America and the Caribbean Brazil Mexico South.4).2 3.8 10.7 5.6 23.3 2.0 3.6 22.1 83.5 29.2 0.8 14.0 30.4 5.0 1.3 7.0 13.2 0.5 0.8 1.3 18.8 16.7 3.7 12.6 2. therefore.7 67.2 2.Chapter V in Japan’s FDI stocks.5 4.7 2.1 6.5 36. a b c d e f Detailed geographical breakdown of FDI is not available on an actual or balance-of-payments basis.3 35.4 35.6 3.6 0. finance and insurance figured most prominently (table V.9 36. a by industry b y region and b y industr y. 1985-1997 b (Percentage) Region/industry 1993 1994 Flows 1995 Stock 1996 1997 1985 1997 By region Developed United States Europe d countries c d 69.3 2.0 18.0 42.6 3.5 15.0 13.0 0.1 38.1 4.0 30. a major shift towards the services sector occurred as well and real estate. 159 .5 1.0 6.3 12.1 51.2 49.5 1. There is no breakdown available at all for industry.6 10.9 62.0 8.3 1.7 12.4 2.8 0.3 3.2 1.6 62.3 4.2 3.1 54.2 1.1 1.2 13.1 33.0 3.8 5.6 2.8 0.7 0.4 4.8 0.9 42.2 10.7 7.4 1.9 0.9 9.4 4.5 1.3 64.5 20.0 57.7 32.6 4. As concerns services.5 30.1 10.3 5. FDI/TNC database.7 18.3 0.5 4.5 1.8 1. Includes Central and Eastern Europe and developing Europe that together account for a negligible share.3 44.4 4.3 17.7 10.0 2.6 2.4 0. Fiscal year (April to March in the following year).4.9 50.8 Source: UNCTAD.2 38.9 2.1 7.7 0.8 1.7 18.4 49.3 1. a major change had occurred already able outward Tab le V.1 3. Includes developing Oceania.2 1.7 1.5 34.3 0. whereas FDI in electric and electronic equipment gathered momentum and now accounts for the largest share in the manufacturing sector.8 12.4 0.9 45. Japanese outwar d FDI on a notification basis.4 4.7 0.4 24.7 8.1 16.5 51.6 6.1 18.8 15.7 2.5 13.2 0.5 23.1 3.6 65.5 4.5 65.9 52.4 4.2 0.8 13.5 3.8 11.3 4.9 7.7 10.5 63.2 58.9 40.7 6.0 9.8 5.8 40. in particular the 1997 share of FDI stock in labour-intensive production in the textiles (including leather and clothing) and iron and steel industries was nearly half that in the mid-1980s. Finally.2 8.5 3.1 4.2 15.5 63.0 4.7 3.8 7.7 15.3 2. East and South-East Asia China West Asia By industry f Primary Manufacturing Food Textiles Chemicals Iron and steel General machinery Electric machinery Transpor t equipment Others Services Construction Real estate Finance and insurance Commerce Transport services Others All regions/industries (Billion dollars) 3.8 0. It is open to question whether the shift in Japan’s FDI from manufacturing to services will continue in the near term.6 5.7 689.5 4.3 22.7 5. figures repor ted in this table are different from those reported elsewhere.6 6.1 0.9 22.8 2.2 29.1 1.7 0.8 6.5 20.6 6.9 12.1 2. Includes South Africa.2 5.8 17.9 16.6 8.8 10.1 3.

g. able foreign branches Tab le V...14 The investment plans of these TNCs do not appear to be affected by lending constraints of debt-ridden Japanese banks. .Tr World Investment Report 1998: Trends and Determinants in 1997 and early 1998. including loans from parent firms. Kansei) are planning investments in the United Kingdom in 1998.5). which carry a large burden of non-performing debt and have to comply with stricter prudential standards. Japan’s FDI in manufacturing does not appear to be greatly affected by its current economic problems. Toyo Trust and Banking Co. 160 . Planned. planning to close all foreign operations in 1998.13 Indeed. going bankrupt in 1997. Likewise. By contrast. a medium-sized firm.5. one-fifth of all foreign branches of Japanese banks are expected to be closed down by the year 2000 (table V. The preoccupation with financial restructuring within Japan may dampen the trend towards services in Japanese outward FDI. since the operations of manufacturing affiliates abroad have traditionally been financed mostly from their own resources. This reflects the need for large-scale restructuring of Japan’s financial industries. based on Nihon Keizai Shimbun . Toyota announced a large-scale FDI project ($590 million) in France in late 1997. Source: a UNCTAD. and various newspaper accounts.. and various Japanese steel companies are interested in acquiring Korean steel producers. . according to a survey by the ExportImport Bank of Japan. 18 March 1998. some Japanese securities firms are also experiencing difficulties. the closing down of foreign affiliates and reduced new flows in these industries would have an impact on total Japanese FDI in the region. and Kankaku Securities. 90 per cent of Japanese TNCs are planning to maintain or even increase the current level of FDI in manufacturing. 27 20 Less than 310 394 262 282 328 259 283 250 51 50 54 157 135 156 . As the importance of financial industries in Japanese FDI is most apparent in Europe. 1998a. suppliers of parts and components for automobiles (e. table 2-16-13). Bank of Yokohama Ashikaga Bank Hokuriku Bank Kiyo Bank Fukui Bank Number of foreign branches 1997 2000 a 22 13 25 23 25 50 12 25 40 36 4 7 6 4 Withdrew all Withdrew all Withdrew all Withdrew all 18 7 18 19 24 48 9 20 23 32 3 4 3 in in in in 1997 1997 1997 1997 Number of domestic branches 1997 2000 a 28 24 339 430 290 322 353 299 305 283 57 50 56 165 140 176 . and by borrowing from non-Japanese banks (Japan.. even though the trend will probably continue on a worldwide scale. with Sanyo Securities and Yamaichi Securities. As a consequence. the latter being one of the four largest securities firms in Japan. 1997 and 2000 Bank Industrial Bank of Japan Long-Term Credit Bank of Japan Dai-Ichi Kangyo Bank Sakura Bank Fuji Bank Bank of Tokyo-Mitsubishi Asahi Bank Sanwa Bank Sumitomo Bank Tokai Bank Mitsui Trust and Banking Co. MITI. For example. Number of f oreign branc hes of major Japanese banks. Yasuda Trust and Banking Co. when flows in financial industries declined considerably.

Japanese FDI outflows to Europe as a share of its total FDI outflows on notification basis fell from their peak of 25 per cent in fiscal 1990 to 15 per cent in fiscal 1996. Data from EUROSTAT. 18. http://www. are reclassified from FDI to portfolio investments. see “definitions and sources” in annex B of this Report. since it has many characteristics typical of developing countries. intracompany debt transactions with finance affiliates in the Netherlands Antilles. 1 April 1998. Sweden and the United Kingdom (UNCTAD. 161 . as well as other financial intermediaries. Data based on FDI outflows from Belgium and Luxembourg. The United States Department of Commerce revised its FDI flow data recently to exclude investments in financial affiliates that are more akin to portfolio investments for 1994-1997. FDI/TNC database). Data from UNCTAD. Although Japan announced a comprehensive economic package of some $128 billion in April 1998 to stimulate the economy. http://www. Including depositary institutions. p. For other years in this Report. FDI/TNC database. The Export-Import Bank of Japan conducts a survey of the investment plans of Japanese TNCs every year. p. 24 February 1998. 28 April 1998. Netherlands. The most recent survey. “EU annual growth quickens to 2. 14 May 1998.eu. Fiscal 1997 (April 1997 to March 1998) had a negative growth rate. in January 1998. On the one hand.4). Nevertheless. was conducted in October 1997. On the other hand. 1.int/ en/comm/eurostat. Note that the 1997 data and the total FDI outflows in 1994 do not include reinvested earnings. Portugal. This is because of two countervailing developments.int/en/comm/ eurostat. Germany. For FDI outflows. France. see UNCTAD. Finland. The results are reported in its periodical.eu. the United States FDI outflows are adjusted to exclude FDI flows to financial affiliates in the Netherlands Antilles only. United States parent companies have accounted for a declining share in total United States trade in goods. “EU has 472 BN ECU in foreign direct investment”. though they increased again to 21 per cent in fiscal 1997 (table V. For details. covering 445 manufacturing TNCs. Journal of Research Institute for International Investment and Development (Kaigai Toshi Kenkyu-jo Ho).europa. For a detailed discussion. Denmark. the share of intra-firm trade in total trade of United States parent companies has increased markedly since 1982. this may not be enough to restore growth. it is also discussed in chapter VI dealing with Africa.6%”. 1994a. Nihon Keizai Shimbun.Chapter V Notes 1 2 3 4 5 6 7 8 9 10 11 12 13 14 The Republic of South Africa has been classified so far by UNCTAD under “developed countries”. With adjustment to European integration almost completed and protectionist fears receding. Frankfurter Allgemeine Zeitung.europa.

Tr World Investment Report 1998: Trends and Determinants 162 .

1. FDI inflows to Africa.1). and the share of Africa in total FDI flows into developing countries remains a mere 3 per cent -.4). to those of a single Asian developing economy. Malaysia -.comparable. hosted higher stocks per Source : UNCTAD. and some countries are doing better than previously in terms of inward FDI. Tunisia and Angola (figure VI.7 billion in 1997. a number of smaller African countries (e.g. With only a few exceptions. all of the 20 most important recipients of FDI experienced increased inflows in 1997 as compared to inflows Figure VI. Lesotho1 and Malawi). Egypt. flows into the region remain low. 1989-1997 1996 (figure VI.2). which received low inflows in absolute terms.3 and VI. Moreover. As in the past several years.but they have risen since the early 1990s. Nevertheless. with both large and small FDI recipients figuring among the highestranking countries in these respects (figures VI.2). accounting together for two-thirds of FDI flows to Africa. $1. Trends Flows of foreign direct investment (FDI) to Africa amounted to an estimated $4. Morocco. the same level as in 1996 but over twice as high as at the beginning of the decade (figure VI. FDI/TNC database.Chapter VI CHAPTER VI AFRICA Trends A. Investment inflows as a percentage of gross fixed capital formation (GFCF) in 1994-1996 and FDI stock as a percentage of gross domestic product (GDP) in 1996 ranged widely among African countries.000 of GDP than many of the larger 163 . for example. the largest recipients in 1997 were Nigeria.

Flows into sub-Saharan Africa were an estimated $2. the decline of investment flows to Nigeria. their inward FDI flows relative to their size have been comparable to or even higher than those of the larger economies (figure VI. However. investment inflows into South Africa (which is classified among “other developed countries” according to United Nations statistics and is not included in the ranking in the figures in this section) showed a significant Source : UNCTAD. South Africa.suggest that FDI flows within sub-Saharan Africa are less concentrated than before.g. down from $3. over a period of time. In countries.paralleled by the decrease in FDI inflows to Equatorial Guinea in 1997 and especially to Nigeria during 19951997 -. high FDI inflows per dollar of GDP might mean simply that GDP growth has been slow or negative over a number of years. under such conditions.2 Among the subregions in the continent. although subSaharan Africa’s share in total investment flows to Africa declined by 10 per cent during 1997. since the majority of least developed countries (most of which are of small market size) have a low FDI-to-GDP ratio (table VI. e. suggesting that. Apart from the sizeable reserves of natural resources that many of them possess. raising its share in total FDI inflows to Africa from 29 per cent in 1996 to 39 per cent in 1997.3 However.1). a large number of sub-Saharan countries are still largely bypassed by foreign investors. the share of oil-exporting countries in FDI flows into Africa remains significant. higher than at the beginning of this decade. Despite the declining flows to Equatorial Guinea and Nigeria. mainly in the petroleum industry played a significant role in this decrease. there is no evidence of a systematic statistical bias in favour of small countries. FDI/TNC database. Africa: FDI flo ws into the top 20 recipient Angola. even a relatively modest foreign investment would appear large relative to GDP.2.9 billion in 1997. According to the South African Reserve Bank. a Ranked on the basis of the magnitude of FDI inflows in 1997. In yet other small economies. However.3 billion in 1996. 164 . North Africa continued to receive increased investment inflows. it remained at 61 per cent in 1997. accounting for slightly more than half of the flows in 1997. The noticeable increases in FDI inflows to flows Figure VI. some countries (like Botswana) are relatively competitive investment locations for FDI undertaken to service the markets of larger neighbouring countries.4). the United Republic of flows countries in 1997 and flo ws to the same countries in 1996 a Tanzania and Uganda during 1994-1997 -. Several factors contribute to these relatively high FDI inflows for the smaller economies in Africa. especially landlocked ones with poor transport infrastructure. firms might find FDI a more reliable mode to service the local market than trade.Tr World Investment Report 1998: Trends and Determinants recipients in 1996.

motor vehicles and components. a Ranked on the basis of the magnitude of FDI inflows as a percentage of gross fixed capital formation in 1994-1996. France became the single most important investor in the region during 1992-1996. while FDI flows from Japan fell considerably during 1992-1996. at the end of 1997. however. Inflows from the United Kingdom suffered a significant dip during 1987-1991. the domestic airline Sun Air. After an initial surge of privatizations in the late 1980s and early 1990s. In 1997. there was a buy-back of 49 per cent of the shares of the vehicle-assembler Delta Motor by General Motors. 165 .4 The increase in 1997 largely reflects inflows due to a limited number of privatization-related projects. including the purchase of a 20 per cent share in the Airport Authority by the Italian firm Aeroporti di Roma (ibid. moreover. overtaking the United Kingdom which had held this position during 1987-1991.5 South Africa may also be seeing the trailing off of an adjustment factor. privatization slowed in South Africa as the new government established new priorities and adopted new criteria for privatization. which had divested in 1989. as did those from the United States and Germany.3. Japan and the Netherlands (table VI. a 1994-1996 1998. 16). The principal home countries of TNCs investing in Africa in the period 1982-1996 included the United Kingdom. such as the Netherlands and Switzerland. Source : UNCTAD. 14). In 1997. as well as sales of six radio stations. Germany. fix ed capital f ormation.7 billion in 1997 (South African Reserve Bank. p. France was. the United Kingdom. British and Malaysian companies in particular were the most dynamic investors. (Annual average) FDI flows continued to be driven mainly by privatization. and a hotel and food group. Germany and Japan. top 20 countries. During the first half of 1998. p. Still. flows percenta centag gross Figure VI. FDI/TNC database. 7 Most investment (60 per cent of total flows) was undertaken in the form of mergers and acquisitions (M&A).6 Over the past four years. unpublished data). Africa: FDI flo ws as per centa g e of gr oss and food and beverages (Business Map. namely the return to South Africa of firms that had limited their presence or operated in neighbouring countries under the pre-1994 regime.2). the United States. France. fixed formation. Malaysia. four-fifths of FDI came from just five countries: the United States. it revived with the sale of 30 per cent of Telkom to a consortium of a United States (SBC) and Malaysian investor (Telekom Malaysia). Some foreign investment may also have been attracted by the restructuring and “unbundling” of large South African conglomerate companies. energy and oil. A number of smaller European countries. FDI unrelated to privatization seems to have decreased between 1996 and 1997. The top target industries were telecommunication. the only major home country that continuously increased its investment flows to Africa during the years 1982-1986 and 1992-1996.Chapter VI increase in 1997: from $760 million in 1996 to $1.

followed by Taiwan Province of China and China.1. United Kingdom’s FDI in Africa (after a Ranked on the basis of the magnitude of FDI inward stock as a percentage it peaked at 37 per cent of total British of gross domestic product in 1996. On the other hand. the relative importance of the secondary sector has decreased for the Source : UNCTAD. Ghana.4. The sectoral distribution of FDI stock in Africa has remained stable between 1989 and 1996 (figure VI. while the product. domestic pr oduct. FDI from developing Asia has increased in Africa in recent years (UNCTAD. however. While French TNCs have tended to invest mainly in the primary sector during the past decade or so (together with increasing absolute volumes also in the other two sectors). Thus far.might suffer a decline on account of the Asian financial crisis that began in mid-l997 is difficult to predict. investment from Germany and more recently the United States has been more dynamic in the secondary sector. top 20 countries. primary and fabricated metals.5). these investments have been confined to limited numbers of countries in the region. Seychelles. 10 However.9 To what extent Asian FDI in Africa . 166 .Tr World Investment Report 1998: Trends and Determinants showed substantial increases in their FDI flows into Africa. there are some striking changes in the sectoral composition of FDI in Africa from individual home countries and changes in it during 1989-1996. Guinea. 1997a). The 1998 survey by UNCTAD/ICC on the effects of the Asian crisis suggests that FDI flows to Africa from Asian countries other than the Republic of Korea might be sustained at a level similar to that in 1997 (see chapter VII). such as Egypt.apart from the Malaysian FDI in South Africa that has already been mentioned -. Zimbabwe8 and South Africa. FDI/TNC database.). Uganda. investments in food and related products. a 1996 importance of FDI in manufacturing has increased slightly in that period from 29 to 30 per cent and the share of FDI in services in total FDI dropped from 33 per cent in 1990 to just 27 per cent in 1996. the United Republic of Tanzania. The primary sector accounts for the largest share of FDI in Africa with around 40 per cent of total FDI stock stock percenta centag gross Figure VI. and other manufacturing have led to an upward trend in FDI in manufacturing and an increased share of the secondary sector in the total FDI stock. The principal Asian developing economies from which FDI flows originated have been the Republic of Korea and Malaysia. In the case of the United States. Africa: FDI stoc k as a per centa g e of gr oss in the period 1989 to 1996. with the former becoming the third most important source of FDI flows into Africa during 1992-1996. Mauritius (box VI.

These include changes in the economic conditions determining inflows of FDI to African economies as well as changes in the policy able flows developed indicators. GFCF = gross fixed capital formation.Chapter VI investment in 1994).. 83 19 7 5 25 204 4 12 1 3 7 7 6 20 -2 7 -0 0 34 53 2 1 16 -2 15 2 5 690 1 24 3 4 23 10 4 6 5 7 23 2 2 -4 16 14 17 (Per (Per cent) 26 1 1 1 1 8 7 -1 .. Tab le VI. For FDI from Germany. i. Including South Africa. France. Germany and the United States. Several factors have contributed to sustaining and increasing FDI inflows into a number of African countries during the past few years. 11 1 5 20 1 13 244 11 19 1 3 9 16 13 16 -3 -3 11 -0 2 114 260 1 4 1 5 -2 15 1 3 110 3 9 9 1 17 14 12 10 11 8 33 4 2 -4 78 70 56 (Dollars) (Dollar s) 23 2 1 1 3 1 8 16 -2 .. 32 6 3 1 7 98 1 2 2 1 2 2 4 3 14 (Dollars) (Dollar s) 24 14 -1 2 1 4 282 8 1 1 9 5 1 1 1 3 2 -1 4 2 6 Memorandum: South Africa Average for developing countries a Average for Africa a -23 212 60 404 613 96 8 7 3 17 10 3 3 2 7 6 -1 8 5 10 20 7 Source : a b UNCTAD. The Guinea Guinea-Bissau Lesotho Liberia Madagascar Malawi Mali Mauritania Mozambique Niger Rwanda Sierra Leone Somalia Sudan Togo Uganda United Republic of Tanzania Zambia 156 3 2 1 1 1 9 4 -13 . selected indicator s. mainly through FDI in banking and insurance.. FDI/TNC database. For United States' FDI. 30 12 5 2 4 231 3 7 2 1 5 4 23 -1 4 35 76 1 1 6 -2 13 1 4 285 19 2 2 3 28 3 5 2 3 4 2 1 -7 10 6 16 17 1 2 2 7 . even though it continues to account for a larger share of United Kingdom FDI stock in Africa than of the FDI stock of any of the other three principal home countries. 1987-1991 and 1992-1996 (Millions of dollars and percentage) inward flows FDI inwar d flo ws P er $ 1 000 GDP Ratio to GFCF b 1987-1991 1992-1996 1987-1991 1992-1996 verag Avera g e 1987-1991 1992-1996 Per capita 1987-1991 1992-1996 dollars) (Million dollar s) Angola Benin Burkina Faso Burundi Cape Verde Central African Republic Chad Comoros Congo. 167 .e.1: FDI flo ws into the least de veloped countries in Africa. the tertiary sector gained in importance in both absolute and relative terms. Democratic Republic of Djibouti Equatorial Guinea Ethiopia Gambia. this sector increased only marginally in importance.

0 23. which has led to a decline in the competitiveness of Mauritian exports.0 49.) There are a number of challenges Mauritius has to cope with in order to safeguard its earlier success in attracting FDI: • One challenge is posed by rising labour costs. have been the most affected. Following the establishment of an export processing zone. Another challenge is the threat of elimination or reduction of preferential access to the European Union and United States markets. FDI in Mauritius Mauritius is one of Africa’s most dynamic examples of economic growth. FDI inflo ws to Mauritius. The economic advantages of the country attracted investment in labour-intensive manufacturing industries. a sound legal system for dispute settlement and yearly accounting practices. (The recent increase was mainly due to one relatively large textile project from India. respectively. fancy goods and toys were also attracted. Investments in Mauritius from three out of the five major home countries of TNCs investing in the country -. flows to Mauritius slowed and even fell for a period.0 13. this at a time when flows into developing countries as a whole continued to increase. • 168 . the country has successfully restructured itself from a predominantly mono-crop (sugar) economy to an export-oriented manufacturing one and has now reached the status of a middleincome country with a per capita income that exceeds by far that of most other African countries ($3. and clearly articulated policies favourable to FDI. however. FDI has played a pivotal role in the development of the country’s economy. indicates that there has been little progress in upgrading and diversification since 1985. a reasonably efficient physical infrastructure including cost-competitive export processing zones. there has been not only a slowdown in attracting FDI into the traditional industries. 1985-1997 (Millions of dollars and percentage) 1985-1990 Annual average Annual growth rate 22. an inevitable consequence of the rapid development process of recent years. rubber. preferential access to the European Union and United States markets. Madagascar and Zimbabwe has also increased competition for FDI in industries that have traditionally attracted it in Mauritius.have also decreased in the last few years. In the early 1990s.Germany. FDI flows to Mauritius peaked in the early 1990s -. /. but the country has also not yet been very successful in attracting FDI into new high-skill and technology-intensive industries. The fact that low-skill activities continue to dominate FDI arrivals accounting for 98 per cent of FDI in both 1985-1989 and 1990-1997.. especially in garments and textiles. Thus.6 Source: UNCTAD FDI/TNC database. Investors in such other labour-intensive manufactures as leather. and the implementation of an export-oriented development strategy in the 1970s.0 92 181. compared to other African countries.the same time that flows to the East Asian economies were growing rapidly. low-cost labour.9 Country/group Mauritius Memorandum: Developing countries 24 720. The emergence of other viable low-cost host countries in Africa such as Kenya. as the Lomé Convention comes up for review.380 in 1995) . In the 30 years since independence. Box table le. Manufacturing industries.0 22.5 1991-1997 Annual average Annual growth rate 23.1. inflows Box tab le . Mauritius’ success in attracting FDI was largely due to its key comparative advantages: skilled. Also.. especially the traditionally dominant textile and garment industries. with investors moving to other lower-cost locations. Mauritius already had a strong business environment with a vibrant entrepreneurial culture very early in its development process.Tr World Investment Report 1998: Trends and Determinants Box VI. China and the United Kingdom -.

including the issuance of multi-entry visas for foreign investors. along with the streamlining of investment promotion activities. especially privatization.among other things -will implement a fast track approval procedure for investment projects. the country’s investment promotion strategy might benefit from more focus on a reduced number of potential sectors and home countries for attracting FDI. Mauritius needs to develop new comparative advantages in its established industries and competitive advantages in emerging industries. Also. Finally. such as a skills development programme. The year 1997 was the fourth consecutive year of growth for Africa as a whole (United Nations. The loss of competitive advantage as a low-cost producer could. and other initiatives to support the technological upgrading of the domestic economy and to make Mauritius a more attractive place for FDI in higher-value-added activities. despite continued efforts on the part of many African countries to pursue strict monetary and fiscal policies to ensure macroeconomic stability. 1998a. based on Lall and Wignaraja (1998) and information obtained from national sources. be compensated for by developing the country’s potential as a regional headquarters for TNCs. 20). A re-engineering of the existing incentive package may also be needed. and has introduced other measures to facilitate investment. increased liberalization of markets. Thus. and more open FDI and trade frameworks as well as business facilitation measures. a reprioritizing of the education and skill-building policies. There have been delays in getting foreign investment approvals in Mauritius. though largely favourable to attracting export-oriented FDI. Mauritius’ FDI policy regime and promotion strategy. Overlaps in the activities of the different public institutions responsible for foreign investment approval and promotion could have resulted in bureaucratic and structural bottlenecks in the approval process.11 However. could be further improved. which together have made it difficult for Mauritius to increase the spread and quality of its FDI. 169 . Mauritius now faces the challenge of moving to a new phase in its economic development. the Government has taken steps to reduce delays in processing and approving investment projects through the establishment of a Board of Investment that -. concluded) • A third challenge is posed by the combination of a limited supply of industrial skills. increasing local value added. Investment in relevant education and skills-building could be accorded priority. the average inflation rate for the continent increased from an already high 34 per cent in 1996 to 47 per cent in 1997 (United Nations. and facilitating research and development. Like the successful Asian economies. Other factors are international initiatives and home country measures to encourage FDI in Africa. Like comparable economies in South-East and East Asia. the establishment of a National Productivity and Competitiveness Council. the Government also supports the increasing outward investment by Mauritius-based companies in other African countries in order to strengthen the competitive edge of Mauritius-based industries. Furthermore. fiscal incentives for foreign investment could be geared more towards promoting technological upgrading. The latter include measures at the national level in host countries. 1) and several countries of the region achieved growth rates exceeding 5 per cent in 1997. The Government of Mauritius has recognized the challenge and has started a number of initiatives to ensure competitiveness in the future. 1998a. creating linkages with local industries. p. a lack of local suppliers of inputs.12 Sudan and (Box VI. a limited technological infrastructure and a low local demand for high technology products. Perhaps the most important factor has been Africa’s macroeconomic performance which has improved significantly during the 1990s. Its potential as an offshore financial centre could be realized with a more active approach to tapping new offshore business. Moreover. there is still need for further improvement of macroeconomic conditions. for example. Source: UNCTAD.1.Chapter VI environment influencing FDI in Africa. in order to target the desired industries. p.

2. 1987-1991 2812 1300 1183 376 197 182 180 172 152 38 37 24 24 11 10 4 -199 6502 Cumulative flows. The accelerated privatization efforts in Egypt in particular. while a number of other developing regions such as Latin America and the Caribbean managed to reduce their inflation rates significantly.5 billion in 1996. contributed to a remarkable increase in privatization sales in that country. Opportunities for FDI have been created by steadily expanding privatization programmes in countries such as Angola. Nigeria. South Africa. suggesting that FDI through privatization was relatively low and that the domestic private sector was the main actor in the privatization process in many African countries. Eritrea. 170 . Uganda and Zambia. Burkina Faso. supported by measures allowing foreign investors for the first time to purchase stakes of more than 50 per cent in public enterprises. Privatization in Africa is becoming an increasingly important -. Nonetheless. FDI/TNC database. In North Africa and the Middle East.Tr World Investment Report 1998: Trends and Determinants the Democratic Republic of the Congo being among the most seriously affected countries in recent years. 106). Madagascar. Mozambique.although far from fully explored -. 1982-1996 4987 4742 3259 1401 1099 1072 912 656 318 256 226 203 107 97 57 48 8 -197 19251 Country United States France United Kingdom Germany Italy Sweden Norway Netherlands Austria Belgium Denmark Canada Switzerland Australia Japan Country United Kingdom France Japan United States Netherlands Switzerland Germany Italy Belgium Canada Finland Norway Austria Denmark Portugal Sweden Australia Country France United States United Kingdom Netherlands Germany Switzerland Italy Canada Norway Portugal Spain Japan Australia Denmark Sweden Finland Austria Belgium Country United Kingdom France United States Germany Japan Netherlands Italy Switzerland Norway Canada Sweden Portugal Spain Austria Denmark Finland Belgium Australia Total 4363 Source: a UNCTAD. the sale of a 30 per cent stake in the Société Marocaine des Industries du Raffinage (SAMIR) to a Swedish investor contributed to the increase in privatization revenues. 1992-1996 2290 1683 1575 807 714 461 282 201 196 194 107 21 17 13 12 10 10 -207 8387 Cumulative flows. a 1982-1996 (Millions of dollars) Cumulative flows. based on OECD. In sub-Saharan Africa. Morocco. 1982-1986 1200 1152 600 507 458 210 98 68 64 63 33 17 13 -15 -105 Cumulative flows. p. Ghana. 1998.avenue for foreign investment. In Morocco. Cape Verde. total sales of stakes in companies to private investors amounted to $1. The major home countries for FDI flo ws into Africa. and by the recent introduction of similar programmes in Botswana. with $1. Tunisia. Kenya. selling a $112 million share in Ashanti Goldfields to foreign investors through an international placement of shares. Namibia and Zimbabwe (see also section VI. able for flows Tab le VI. followed by Kenya with $137 million. Egypt. Ghana topped the list with $186 million. a 100 per cent increase as compared to 1995 (World Bank.B).2 billion of the sales occurring in Egypt alone. $299 million of a total of $623 million in privatization sales in 1996 were raised through sales to foreign investors. Cote d’Ivoire. foreign exchange earnings from privatization in North Africa and the Middle East in 1996 were less than 10 per cent of the value of total sales. Table only includes the member countries of the OECD Development Assistance Committee (DAC). Senegal.

a b Includes South Africa. FDI stock fr om France . 1989-1996 (Millions of dollars) Source : UNCTAD. 171 . b y sector. the United Kingdom and the United States in Africa. a sector. Germany.5. Germany Figure VI. based on national sources. Figures for 1989 tertiary sector were not available.Chapter VI stock from France.

1997f.0 100.0 70. (Malysia) BP (United Kingdom) Foreign investors a Marubeni (Japan) Tata Zambia Ltd.13 Zambia is planning the privatization of mines and the national insurance corporation in 1998. 28 of these legal instruments having been introduced or amended in the 1990s (chapter III). a Name of company not disclosed. Avon Cycles Modern Trading Agencies Agip Petrol International (Italy) Foreign investor a Zambia Zambia Ghana Zambia Tanzania Tanzania Uganda Uganda Petroleum Manufacturing Automotive services Tourism Industry Industry Petroleum distribution Agribusiness 25.6 1. In 1998.5 Pre-emptive rights Pre-emptive rights Joint venture Tender Sale of shares Sale of shares Sale of shares Sale of shares Source: UNCTAD.0 .0 . dating from 1987-1988. 1996 (Millions of dollars) Equity share acquired (Per Amount (P er cent) 5. among other things. According to a recent survey of least developed countries. African countries have also made efforts to improve their national policy frameworks for FDI. and a palm oil plantation. exposing them to competition.1 4.0 90.8 2. Total (U) Ltd Domaine Heveicole de L’Etat Cavally Tema Shipyard & Drydock BP Zambia Ltd & Zamlube Refiners Ltd Metal Fabricators of Zambia Ghamot Motors Pamodzi Hotel National Bicycle Co.1 30..0 1.0 70.0 112. pharmaceutical and bottling companies. 172 . Panwell Group Tomos (Slovenia) KLM (Netherlands) SIPH (France) Lonrho Zambia CDC (United Kingdom) Total Outre Mer (France) CDC (United Kingdom) PSC Terna Shipyard Ltd. 1998). table T. 50.0 60. Ghana intended to sell 20 state enterprises.2 2.4 5. Ltd National Engineering Co.7 1. 3.1 2.. unpublished data. Ghana’s preferred pattern is to find a combination of foreign partners and local holders by offering minority stakes on the stock market.7 9.A2).3). Namibia’s strategy is first to “commercialize” state enterprises by. Mozambique has one of the oldest programmes.A1 and T. Joint venture Purc Pur c haser(s) Institutional investors GMG Investments PTE.0 51.. including a cocoa buying company.0 75.3 3.2 41. only six of the 29 least developed countries in Africa for which data were available still had a restrictive regime for the repatriation of dividends and capital (UNCTAD. Ltd Country Countr y Ghana Cameroon Ghana Kenya Ghana Zambia Malawi Uganda Cote d’Ivoire Ghana Industry Industr y Mining Agriculture Automotive services Airlines Industry Brewery Cement Petroleum Agriculture Transport Method of sale Sale of shares Tender Sale of shares Direct sale Joint venture Tender Direct sale Sale of shares . Botswana issued its white paper on privatization in December 1997.2 Company Compan y Ashanti Goldfields HEVECAM Tomos Ghana Ltd Kenya Airways Ghana Rubber Estate Ltd Northern Breweries (1995) Portland Cement Co.2 26..0 33.0 26. Priv atization transactions involving foreign investor s in Africa.0 23. Ltd Agip (U) Ltd Kibimba Rice Co. These privatizations are generally based on long-term programmes and thus can be expected to continue to attract FDI.0 75.3.0 5. .0 50.6 5.Tr World Investment Report 1998: Trends and Determinants which included a share of 26 per cent of Kenya Airways sold to KLM for $26 million (table VI.0 50. an oil refinery and an oil company. with privatization intended as the long-term outcome (SADC / Financial and Investment Sector Coordinating Unit (FISCU). Madagascar formed a Ministry of privatization in 1997 and plans to include the national airline and oil company and telecommunications in its programme. based on World Bank. Some 47 of the 53 African countries had adopted national laws governing FDI by 1997. All other able Privatization inv foreign investor vestors Tab le VI.

13 5. according to the results of a survey by the World Economic Forum.35 5. almost all of the 23 African countries included in the survey received good evaluations of their dividendremittance and investment-protection policies (see also section VI.63 5.40 4. which numbered 326 in 1997.B. 1998a). respondent companies considered that in a number of policy areas -including trade.50 4. other Ranking of FDI protection pr otection b 4. Ghana.Chapter VI countries had free or relatively free regimes that allowed the remittance of profits without major obstacles.82 4.09 5.88 4.33 6.47 5.95 5.50 Ranking of dividendremittance policies c 6. such as the TRIPS or TRIMS Agreements.72 3.33 6.43 5.92 5. 1997g).20 4. a large number of African countries have signed bilateral investment treaties. The term FDI “front-runner country” refers to Botswana. Efforts on the part of many African countries to improve their FDI frameworks have reached such a level that “the perception that Africa is a risky place to invest is therefore correct only to the extent that in some African countries.06 4.05 5.13 6. 173 . In addition to the improvement of national policies related to FDI (see also section VI. by 1998.15 5.10 4.20 4. road infrastructure and telecommunications -.59 5.84 4.59 5. p.00 5. Investment-protection schemes are readily available for most foreign investors.VI. under the umbrella of the WTO Final Act of Marrakesh (UNCTAD.70 Country Countr y Botswana Burkina Faso Cameroon Côte d’Ivoire Egypt Ethiopia Ghana Kenya Malawi Mauritius Morocco Mozambique Namibia Nigeria South Africa Tanzania Tunisia Uganda Zambia Zimbabwe Average. for instance. and the availability and affordability of telecommunication infrastructure and computers were assessed by the companies to have been the areas with the greatest progress (WEF.00 3.56 3. FDI frontrunner countries d Average.25 5.89 4.67 4.00 5.61 4.65 5.25 4.22 5. 1997 Ranking of xchang hange e xc hang e rate policy policy a 6. although some countries are still in the process of revising domestic laws and notifying the WTO. Dividend-remittance policies do not impede business development.94 4. and annex table A. the majority of African countries (41) had signed the Convention establishing the Multilateral Investment Guarantee Agency (MIGA). Tunisia and Uganda (see section VI-B).22 6.79 4. obsolete laws and excessive bureaucratic practices still exist and create an unfavourable investment able investor Tab le VI.B.).4). Most countries have also enlarged the number of industries open to foreign investment and many now produce lists of the few restricted industries rather than lists of the many open to investment.90 5.04 5.24 4. Thus. governance.32 5. based on World Economic Forum. according to se veral indicator s. The investor friendliness of the FDI regulatory framew regulator y frame w ork in Africa: rankings according several indicators. Note: a b c d the investors in the par ticular countries were asked to give evaluations between 1 and 7 ( 1: strongly disagree and 7: strongly agree ) for the following statements: The exchange-rate policy is favourable to expor t expansion. Namibia. and table VI. African efforts to reform FDI policy are increasingly acknowledged by both domestic and foreign investors. improvement in institutions.58 6. Equatorial Guinea.68 5.46 4.90 Source: UNCTAD.1).42 5. 40 African countries have adopted the Paris Convention for the Protection of Industrial Property and 41 African countries have signed one or more agreements in the WTO relating to FDI.09 4.43 4.82 6.96 4. 1998a. 20).23 6.50 6.51 5. Mozambique. access to finance. as well as the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (42) (see also section VI.03 4.16 5. Also.significant improvements have taken place in Africa as a whole (WEF.09 5.75 5. In addition.59 5.20 4.70 5. Openness to trade.10 5.69 5.B.4. 1998a.

exchange of experiences as to promotion practices and business intelligence. 1997 Country Algeria Angola Cameroon Cape Verde Congo.Tr World Investment Report 1998: Trends and Determinants climate” (Mutharika. p. They may also gain easier access to the markets of some of the able members Investment Promotion Agencies (WAIP AIPA). the continent as a whole does not fare much worse than other developing regions (WEF. such as the reduction of bureaucracy and corruption as well as policies to promote FDI become more important. South Africa. measures to facilitate business. 280). The Ghana Kenya Lesotho Mali Morocco Namibia Nigeria Senegal Seychelles Sierra Leone Sudan Tanzania Tunisia Uganda Zambia Zimbabwe Agency’s name Agence de Promotion de Soutien et de suivi des Investissements (APSI) Instituto do Investimento Estrangeiro (IIE) Investment Code Management Unit (ICMU) Center for Investment. 1997h. African countries have now established investment promotion agencies that focus on attracting foreign investors through a variety of measures. in June 1998 to discuss possible cooperation in joint marketing missions. 1997. the investment promotion agencies of the member countries of the Southern African Development Community (SADC)14 held a joint meeting in Centurion. Industry and State Entreprises General Administration for Investment Promotion Zanzibar Investment Promotion Agency Foreign Investment Promotion Agency (FIPA Tunisia) Uganda Investment Authority (UIA) Zambia Investment Centre Zimbabwe Investment Centre Source: based on UNCTAD. Democratic Republic of Cote d’Ivoire Egypt Ethiopia Gambia. there are also signs of increased activity in joint investment promotion at the regional level. For example. The steps towards better access to foreign markets for least developed countries which were announced at a high-level meeting hosted by the WTO in October 1997 improved the access of the 33 least developed countries in Africa to the United States market subject to certain conditions.5. 174 . Ministere des Finances et des Investissements Exterieurs Namibia Investment Centre Nigerian Investment Promotion Commission (NIPC) Guichet Unique Seychelles International Business Authority (SIBA) Department of Trade.there are significant differences among African countries and.5). as macroeconomic conditions improve and ). and provided long-term guarantees of their present access to the European Union under the Lomé Convention. Twenty-five African investment promotion agencies are currently members of the World Association of Investment Promotion Agencies (WAIPA) (table VI. judging from companies’ assessments. The efforts by African host countries to improve their investment climate are also increasingly complemented by interregional initiatives to promote investment and trade. While it is true that “red tape” is a problem in many African countries and corruption is still widespread -. Moreover. Tab le VI. African member s of the World Association of Investment Pr omotion Ag encies (WAIPA). and a joint staff-development programme. 1998a. p. Export and Tourism Promotion (PROMEX) Fonds de Promotion de l’Industrie (FPI) Centre de Promotion des Investissements en Cote d’Ivoire (CEPECI) General Authority for Investment (GAFI) Ethiopian Investment Authority (EIA) National Investment Promotion Authority (NIPA) Ghana Investment Promotion Centre (GIPC) Investment Promotion Centre (IPC) Lesotho Investment Promotion Centre (LIPC) Centre National de Promotion des Investissements (CNPI) Direction des Investissements Exterieurs. Indeed. 28). regulatory frameworks are becoming more liberal.

15 Apart from the activities of the European Union. In the case of United States FDI (table VI.as judged by the United States administration. especially export-oriented FDI. including developed countries as a group. p. p.6). the rate of return in Africa has averaged 29 per cent and since 1991 it has been higher than that in any other region. Since 1990. is already attributed to the fact that it will be a part of the free-trade zone with the European Union in 2010. 1997. it is noteworthy that between 1980 and 1997 there was only one year (1986) in which the rate of return on investment was below 10 per cent. These include the provision of information. 175 . Thus. p. At the micro-level. 131) and.Chapter VI more advanced developing countries. the Overseas Private Investment Corporation (OPIC) has been asked to play a lead role in the initiative by establishing a $150 million fund for equity investment in Africa and by setting up a $500 million private equity fund for investment in particular infrastructure projects. Morocco and Tunisia -can also significantly promote trade and investment flows. the United States House of Representatives approved in March 1998 the African Growth and Opportunity Act. Some FDI in countries such as Morocco for example. 279. Lang.B). with the expectation that the fund will induce private investors to participate (Mutharika. The Centre for the Development of Industry. in particular. if the agreements are broad enough in their coverage. By 1997. In addition. The initiative includes a proposal to remove all quotas and tariffs for apparel and textile imports from Africa. Net income from British direct investment in Africa was reported to have increased by 60 per cent between 1989 and 1995 (Bennell. in 1995. what is of particular interest to investors is the profitability of their investments in Africa. Within the framework of the current Lomé Convention. the measures under the Act are subject to conditions that countries must satisfy -. These include. e. promotes technical or commercial partnerships between European firms and firms from African. Egypt. in many years. However. by a factor of two or more. for example. 279).g. Caribbean and Pacific countries. through providing assistance in finding appropriate partner companies or co-financing feasibility studies. and matchmaking programmes that bring domestic and foreign firms together. OPIC had provided $775 million in political risk insurance and finance for investments in about 40 African countries (Mutharika. that countries have established or are making continued progress towards establishing a market oriented economy and do not engage in gross violations of internationally recognized human rights. Japanese affiliates in Africa turned more profitable than in the early 1990s and have been even more profitable than those in any other region except for Latin America and the Caribbean and West Asia (figure VI. 1997. 1997a. the European Union offers several schemes to support investment in the African. Improved access to developed country markets may increase the chances to attract efficiency-seeking FDI for those countries that already have the conditions for such investment in place (see section VI. have undertaken measures to promote investment in developing countries including some in Africa. individual member states of the European Union. Caribbean and Pacific partner countries. along with a number of other OECD countries. There are also important initiatives by home countries to encourage companies to invest in Africa. the support of feasibility studies.such as the association agreement between North African countries and the European Union that foresees the creation of a free-trade area between the European Union and Algeria. 1997). Other interregional agreements -. designed to promote private sector initiative in Africa in general and FDI in particular.6). The idea of giving FDI a more prominent role vis-à-vis official capital flows has also been discussed within the framework of the design of the forthcoming new Lomé Agreement.

6 20.9 13.6 4. 1997a.4 1993 25.0 12.4 14.8 48.6 7.1 17.0 8.1 13.4 23.9 11.Tr World Investment Report 1998: Trends and Determinants able Tab le VI.3 1991 30.9 16.3 14.2 36.8 15.8 22. excluding Australia.9 11. 1998a.3 . based on Japan.3 34.8 14. various years).a.6.6 35.2 12.7 22.1 30.5 14.0 20.7 1995 35. .6 23.5 11.2 10.1 9.2 24.3 Region Africa c Primary d Manufacturing d Tertiary d Other Asia e Latin America Developing countries All countries 1983 17. Excluding South Africa.8 3.9 12.8 13.5 1989 17.8 26.2 13.5 13.1 billion in 1997 (figure VI.3 13.9 21.7).3 19.9 17.0 15.7 14. However. The increase was mainly due to the rise (from $500 million in 1996 to $800 in 1997) in outflows from Nigeria and an increase of outflows from Liberia from -0.0 21.5 13. Department of Commerce.6.5 21.1 15. Profitability of f oreign affiliates of Japanese TNCs.0 10.6 14.8 19.3 12.0 20.9 30.8 19. 28.although in 1995 there was an increase in this figure to 516 (United States.4 billions in 1996 to more than $200 million in 1997. Israel.7 19. a b c d e The rate of return is calculated as the net income of United States foreign affiliates in a given year divided by the average of beginning-of-year and endof-year FDI stock.0 27.1 7.4 15.4 29.3 9. 176 . 16.3 Source : UNCTAD.9 10.4 n.6 7. a 1983-1997 (Percentage) 1996 1997 b 34.9 11.7 44.a. Including South Africa. various issues)16 -and that of the latter from 669 in 1984 to 573 in 1996 (Deutsche Bundesbank.6 1992 28. based on United States.2 42.9 13.6 1986 5. judging from the number of foreign affiliates of United States and German TNCs in the region. East and South-East Asia and the Pacific.6 36.6 35. 23.0 1984 23.6 8..3 10.2 13..0 26.3 16.4 13. p.7 27. n. Rates of return on United States FDI in Africa and selected regions.7 41. .4 19. Investment outflows from developing Africa increased from $ 0.9 2. Japan and New Zealand. Depar tment of Commerce.0 27.2 14.3 billion in 1996 to 1. Including West Asia.8 21.a. b y selected host region.4 1988 13.0 14.135).4 12. Profitability foreign by Figure VI.1 15.4 23.5 23. 136).8 1990 24. the number of TNCs that enjoy these profits appears to be declining.1 1994 24.2 1987 15. 1995 (Percentage) Source : UNCTAD.3 1985 17.2 16.9 18.1 9.3 15.2 22. The stock data for 1997 used in the calculation are estimates by the United States Department of Commerce.7 17. These two countries accounted for over two-thirds of outward investment from Africa during 1994-1996. .. The reduced number of affiliates has been attributed to divestment by some TNCs that had decided to re-focus their investment on core activities and core regions for their business and for which the reforms in Africa in the 1990s came too late to influence that decision (Bennell.5 13.3 12.0 n.5 20.2 40.8 20. which has dropped significantly between and the mid-1980s and mid-1990s.9 22.3 17.6 13. Ministry of International Trade and Industry. The number of the former declined from 596 in 1982 to 444 in 1994 -.4 16.1 18. various issues. Other reasons for divestments by TNCs include problems in remitting profits as well as a deteriorating and difficult business environment that led to significant “hassle costs” for the private sector (ibid.5 13..5 12.5 25.3 23.5 15. South.0 17.8 12. p.4 16.1 18.

These "frontrunners" demonstrate that African countries can become attractive locations for foreign investors. Growth. On the other hand. there are countries that stand out with an FDI-attracting performance in recent years that is not only better than the average for African developing countries but also above the average for all developing countries. even in a period when reports of political unrest and economic instability prevent many investors from exploring the opportunities 177 . B.2 billion in 1994-1996. the simultaneous improvement in policy initiatives both externally (such as the least-developedcountry initiative by a number of international organizations and the Africa initiative of the United States) and internally augurs well for foreign investment in Africa notwithstanding the slight fall of FDI inflows into sub-Saharan Africa in 1997. especially the prices of petroleum. however. Africa: FDI flo ws fr om the top 17 outward investor flows from countries in 1997 and flo ws from the same countries in 1996 a There are encouraging signs that Africa may expect rising inflows of FDI in the future. others are still waiting for inward investment to take off. In sub-Saharan Africa.7. While some countries are benefiting from increasing FDI inflows. It is also possible that in some countries the change of legislation has not yet been reflected in administrative practice. being put in place in an increasing number of countries. However. Inward FDI flows to North Africa have shown a robust positive trend in the 1990s. could reduce the attractiveness of some of the countries that have been major recipients of FDI in the recent past. FDI/TNC database. the decline in commodity prices. Indeed. Angola and Nigeria. Which countries are they? Africa as a whole trails other continents in attracting foreign investors. economic reform and improvements in the regulatory frameworks of many countries are increasingly recognized by both domestic and foreign investors. frameworks for investment are a Ranked on the basis of the magnitude of FDI outflows in 1997. Recent country success stories 1. total annual average inflows have also risen. including South Africa. to attract greater investment. This makes it important to explore what can be learned from the frontrunner countries in Africa about improving performance as well as image. from $ 3.2 billion in 1991-1993 to $5. gold and diamonds.Chapter VI *** flows from outward investor Figure VI. But economic fundamentals in the region are improving and enabling policy Source : UNCTAD. suggesting either that the improvements in economic prospects and the investment climate are not yet attractive enough or that they have not yet become widely apparent to potential investors.

Thus. it needed to perform not only better than the average African country but also better than the average developing country. no indicators measuring the quality of the investment received have been used. This filter yields the following seven countries (table VI. To qualify as a frontrunner. To capture the dynamics of performance. Democratic Republic of Congo. namely an improvement in the performance on any of the four indicators which is above the level of improvement of developing countries as a group. the latter (the denominator) did not decline. This section identifies a group of recent frontrunners and examines their characteristics and the factors underlying their success. Chad. 1992-1996.7):18 • • • • • • • Botswana Equatorial Guinea Ghana Mozambique Namibia Tunisia Uganda The countries represent the most dynamic countries in Africa in terms of attracting FDI flows during 1992-1996 according to the selected methodology. but because it is a period which has seen an economic recovery and a return to relative political stability in the continent and widespread policy change in the FDI area. the Gambia. This filter yields the following 18 countries: Angola. subject to the condition that in the case of an indicator that related absolute FDI inflows to an economic variable. Because the analysis focuses on recent success stories. 1992-1996. to receive FDI flows above the developing-country average as measured by at least one of these indicators. as opposed to stock indicators. Ghana. Mozambique. average FDI inflows per $1000 GDP. the United Republic of Tanzania. In other words. Liberia. Tunisia. Lesotho. average FDI inflows per capita. the following indicators have been used to measure performance with respect to inward FDI17: • • • • average annual absolute inflows of FDI. a country had. Equatorial Guinea. As the analysis does not focus on the impact of FDI. they accounted 178 .Tr World Investment Report 1998: Trends and Determinants that the continent has to offer. Together. flow indicators have been used. first. The period 1992-1996 has been chosen not only to average out annual fluctuations. Botswana. the increase in the value of at least one of the indicators from the period 1987-1991 to the period 1992-1996 for the country had to be higher than the increase in the same indicator for the average developing country. 1992-1996. Namibia. they are static forms of measurement. 1992-1996. for a country to be counted as a frontrunner. Uganda and Zambia. For the purpose of this analysis. these 18 candidates had to pass through an additional filter. The four indicators used capture only the level of FDI performance during a given period. Nigeria. which tend to reflect FDI performance over a longer period. Seychelles. Egypt. average ratio of FDI inflows to gross fixed capital formation.

Conversely.3 7. The group of the selected frontrunners is heterogeneous not only in their level of development (Equatorial Guinea.1 11.3 15. 179 .3 5.19 The frontrunner group.8 14. GFCF = gross fixed capital formation. Morocco and Nigeria that rank high among African countries on the basis of FDI stock indicators (annex table A.9 3.8 .VI.5 6.4 -1.3 108. As regards economic structure.average FDI flows during 1992-1996 (since either absolute or relative FDI performance above the developing country average allowed a country to enter the ranks of the frontrunners. Mauritius.1 12. the frontrunner group excludes some African countries that were among the largest recipients of FDI flows during 1992-1996.7. Africa: Recent FDI frontrunner s by selected indicator s.2 29. moreover.6 16.9 109.0 189 8. all of these “historic” frontrunners lacked dynamism as defined by the second criterion mentioned above and are therefore not in the centre of this analysis. Uganda experienced negative FDI inflows of $1.1 613. Nigeria) received significant amounts of FDI flows during the period under consideration.7 11.0 10. This heterogeneity underlines the need for a broad-based analysis of the determinants contributing to the relative success of the frontrunners in attracting FDI. does not include a number of countries such as Egypt.5 37.9 2.9 78 732 869 247 163 197 18 816 6.8 20. Equatorial Guinea is an oil-based economy and attracts FDI almost exclusively with its rich endowments of offshore oil reserves. 1987-1991 and 1992-1996 (Millions of dollars and percentage) Avera verag inflows year Avera g e FDI inflows per year 1987-1991 1992-1996 dollars) (Million dollars) Change Chang eb (Per (Per cent) inflows FDI inflows per $1000 GDP 1987-1991 1992-1996 dollars) (Million dollars) Change Chang eb (Per (Per cent) inflows Ratio of FDI inflows to GFCF a dollars) (Million dollars) (Per (Per cent) inflows FDI inflo ws per capita dollars) (Million dollars) (Per (Per cent) Change Change 1987-1991 1992-1996 Chang eb 1987-1991 1992-1996 Chang eb Botswana Equatorial Guinea Ghana Mozambique Namibia Tunisia Uganda c Average for Africa d Average for all developing countries d 56.5 23.g. In the years 1989 and 1990.7 1.1 60 6.9 million. with more diversified economies.1 33.3 100 845 754 201 99 158 15 175 46 32 1 1 23 11 0 95 282 7 2 72 44 4 108 778 778 228 221 306 16 672 60.4 54 3. more than offsetting the positive inflows of the other years in the period 1987-1991 and resulting in a negative sum for the FDI inflows of that period as a whole.2 1. while other frontrunners such as Tunisia and Ghana. Percentage change during the period 1987-1991 to 1992-1996. Including South Africa.9 9. It should be noted that two of the frontrunners (Mozambique and Uganda) received below African.8 98 8 20 164 Source : a b c d UNCTAD FDI/TNC database.4 33.5 30.7 121.1).5 .1 689. Tab le VI.3 77.1 96.3 111 3. receive significant FDI in non-primary sectors.0. able frontrunner by ontrunners indicators.6 86.2 8.9 77 5 7 39 212.6 143 888 920 263 267 348 19 796 18.9 285.1 6. but also in their geographic location on the continent. Mozambique and Uganda are least developed countries (LDCs) while Botswana and Tunisia are middle-income countries).0.7 10. Although some of them (e.2 17.2 14.8 and $5.4 3.Chapter VI for more than 24 per cent of FDI flows into Africa in 1996 while representing only 9 per cent of Africa’s population and 8 per cent of the continent’s GDP.8 9.5 23.4 387.4 137. This suggests that these two countries had only recently begun to attract FDI or resumed doing so after a break.6 82. provided the second criterion regarding an increase in one of the indicators was satisfied as well).

As judged from several admittedly rough indicators such as the mean tariff level applied in 1990-1993 or the proportion of all goods covered by nontariff barriers. However. only for a few of the frontrunners could the level of macroeconomic stability have played an important role in attracting above-average FDI. Thus. Although the threat of unrest and armed conflict has not disappeared. With the exception of Namibia. As regards trade policies. has like some other (non-frontrunner) 180 . Thus. As for the government deficit as a percentage of GDP.9).was that it was seen as a stable country with a strong economy and fewer uncertainties than other potential locations (Corporate Location. conditions have improved .including the predictability and reliability of the regulatory framework affecting business. 39). in Mozambique which has seen the ending of a long-standing civil war. p. (a) The policy framework Almost all of the countries that have been identified as frontrunners have made considerable progress in acquiring or regaining political stability in recent years. although their deficit levels in the 1990s are still higher than the African average.Tr World Investment Report 1998: Trends and Determinants 2. apparently. Tunisia. being influenced by the political situation of a country. one of the frontrunners. one of the reasons why Hyundai decided in 1993 to establish its car assembly plant in Botswana -.as. p. but there is no evidence that the trade regimes of the frontrunners have differed significantly from those of other African countries in the 1990s. Since political stability -. 1998. While almost all frontrunner countries show a trend towards increased macroeconomic stability. the situation is mixed. for example. although the frontrunners’ ongoing efforts to improve the macroeconomic picture could have been perceived by foreign investors as evidence of the long-term commitment of their governments to create a more stable and business-friendly environment. such as the tax system -.21 However. Tunisia is the only country in the group with a relatively low rate of inflation of 5. With respect to economic stability. All other FDI frontrunners had significantly higher rates. the frontrunner group has also made progress. another important factor influencing FDI flows to a country. 9).has been found to be the most basic factor for companies considering investment in Africa (Sachs and Sievers.2 per cent for the 1990s. For example. it might well be a key factor explaining the recent performance of the frontrunners. there is a general trend towards more open trade regimes in Africa. the degree of stability varies significantly and not all members of the group have performed better than the rest of Africa. all the frontrunner countries for which data were available have reduced their budget deficits gradually since the beginning of the 1990s (table VI.8). in particular outside the primary sector. some of them exceeding an average of 20 per cent for 1990-1996. Why do they perform well? The heterogeneity of the frontrunner group of African countries identified above suggests that a variety of determinants has to be looked at in a search for the underlying reasons for their superior performance as regards inward FDI in recent years (chapter IV). There are several examples of TNC decisions. another indicator of macroeconomic policy.intended mainly to service the South African market -. there appears to be no systematic difference between the front-runner group and other African countries. nor were the frontrunners necessarily more integrated into the world economy as measured by the ratio of the sum of exports and imports to GDP20 (table VI. six of the seven frontrunners managed to reduce their average annual inflation rate in the 1990s. 1994.

In terms of signing international agreements governing investment protection (annex table A.7 Overall government deficit(-) or surplus (+) as a percentage of GDP (current prices) 1990-most recent year b (IV) 5. In most of the other frontrunner countries. Africa: selected indicator s of macr oeconomic stability f or recent FDI fr ontrunner avera verag for countries and a vera g es f or all Africa (Percentage) Overall government deficit(-) or surplus (+) as a percentage of GDP (current prices) 1980-1990 (III) 9.7 .9 17. among other things with the help of appropriate trade policies.3 47.5 4.6. The other countries in the group have signed only some of the existing conventions (annex table A.9 30. Botswana.9.8 4.12.5 2.9 6. all Africa c Rate of inflation 1980-1990 (I) a 10.2 16.0 . “Most recent” refers.7 30.1. and.5 16. have signed the convention establishing MIGA. the International Convention for the Settlement of Investment Disputes between States and Nationals of other States (ICSID) and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards.3. 1998. This has involved.4 52.6 .6 Difference (IV) . The latter is particularly true for Equatorial Guinea and Namibia.5 5. Mauritius and Morocco. As for the policy framework for FDI per se. while in the rest of Africa only 34 of 46 countries have able indicators macroeconomic for frontrunner Tab le VI.9 6.0 .1 Rate of inflation 1990. p.most recent year (II) a b 11. to 1996.0 .8 43.4 2. like other frontrunner countries.3 17.5 8.5.9 .6 + 14. managed to attract efficiency-seeking FDI in such industries as textiles and apparel. and there are shortcomings in areas important for the successful attraction of such investment (see subsection (c) iii below).1 5. the regulation governing the Industrial Free Zones designed for investors with a minimum investment of $5 million and a required minimum export content of 85 per cent of production came into effect only in January 1998 (SADC/FISCU. Including South Africa.9. In Mozambique.8.4.22 These countries have signed all principal international conventions related to FDI and are members of all relevant international institutions that deal with issues related to FDI.86. the most active countries in the group are Ghana.6 -16.3 103.1 .7 Difference (II).(III) -3.0 Country Botswana Equatorial Guinea Ghana Mozambique Namibia Tunisia Uganda Average. (1980 = 100). including MIGA.2).14.18.1 .2 12. to a lesser extent. although with significant differences.5 . such as exemption from import duties for inputs into export goods manufactured in the country or other trade privileges for companies operating in export processing zones (EPZs).8 11. However. export-oriented industries is only just beginning.4 0. all of the frontrunner countries appear to have made special efforts to improve regulations and measures concerning FDI. offering special incentives.0 3. a b c Refers to consumer price indices (general).(I) + 0.2 10. the setting up of EPZs or other schemes particularly targeted at investors in efficiency-seeking.VI.9 9.Chapter VI countries including Egypt. Tunisia and Uganda. in most cases.9 - .4 .VI.8 -3.2).8 5.3.7. among other measures. even these countries.6 . 181 . 1998.8 Source : UNCTAD. 59).2 . for instance. based on African Development Bank.

2 25.1 .... in a survey of investors in 23 African countries.8 55. on average. c 1990-1993 106. 182 .. .Tr World Investment Report 1998: Trends and Determinants done so. 11. While the frontrunners signed.1. In bilateral investment agreements (BITs) also.3 50.higher than the frontrunner average of five.3 3.. .9 -3.0 17...3 .2. Computed as the difference between the end points of the period shown. c 1990-1993 Standard deviation of tariff rates. which was below the average for the non-frontrunners.. the frontrunner group appears to have been more active than other African countries. conducted by the World Economic Forum (WEF. averaged over ten years. . In the conclusion of double taxation treaties (DTTs) the picture is also mixed among the frontrunners.3 0. 1998a). with Namibia and Tunisia receiving the able indicators barriers Tab le VI.. almost eight such treaties per country.6 and 6...3 28. . ... By 1 January 1998.2 . 35. the subjective perceptions of investment regulations by foreign investors provide some evidence that the frontrunner countries. .9 . -0.25 the group’s investmentprotection schemes for foreign investors received higher average marks from respondents than the other countries included in the survey.3 9. c 1990-1993 Country FDI frontrunners Botswana Equatorial Guinea Ghana Mozambique Namibia Tunisia Uganda Other African countries Egypt Lesotho Mauritius Morocco Nigeria Mean tariff rate. For all goods. the national investment codes of most of the FDI frontrunner countries had been revised by the mid-1990s with the general aim of encouraging investment.4) Thus. a b c Real trade is the sum of exports and imports of goods and ser vices measured in constant prices.3 .. . 42. there are differences within the group: i. 30. All other frontrunner countries for which data are available had signed five (Namibia) or fewer such treaties. Again.0 5.. . ..6 28.9. 15. the other frontrunners had all concluded less than five BITs each by the end of 1998.0 . by and large. based on World Bank.7 . as with international conventions..7 .1 . Tunisia had signed 23 such treaties -.9 . 33.2 .5 .4 . 4.82 0. The average for the 45 African non-frontrunner countries was more than seven DTTs each -.7 9.. 1997c..... . 32. the 41 non-frontrunners for which information was available averaged only five BITs per country. 13.5 34. had made more progress in creating a regulatory environment conducive to FDI than most other African countries (see table VI. 81.. 24.6 83.23 With respect to national policy frameworks for FDI.more than half of the 41 treaties concluded by the whole frontrunner group and more than any other African country.0 .5.. 8.e.5 -1. while Tunisia signed 41 BITs (exceeded only by the 43 signed by Egypt) and Ghana nine. tables 5.1 24.39 . Africa: total real trade a as a share of GDP and indicator s of trade barrier s frontrunner in recent FDI fr ontrunner countries and other African countries (Percentage) Real trade as share of GDP Average annual difference Share 1980-1983 to 1981-1993 1990-1993 b Proportion covered by non-tariff barriers.24 While there is no comprehensive comparison of investment codes of African countries based on objective criteria.0 45. . 21.2 ...8 Source: UNCTAD.

on average. while most of the companies have been sold to Mozambican entrepreneurs. In this case. The only exception was Mozambique. “red tape” remains an important obstacle for investment even in many frontrunner countries. another major component of an FDI framework. Mozambique and Namibia (WEF.218). Tunisia and Botswana received particularly high marks. p.4). with each accounting for more than 100 privatization transactions up to 1997 (see section VI.as compared to other FDI-related policies. in particular from Portugal. with their average evaluation again higher than the others’. pp. Companies doing business in frontrunner countries also confirmed more strongly that state interference in private business was minimal (WEF. 1998a. some of the FDI frontrunners are doing much better. Still.30 A recent study on administrative barriers to investment in Mozambique highlighted bureaucratic impediments to investment that the frontrunners share with the majority of developing --and sometimes even developed-countries (IFC. government regulations impose less of a burden on business competitiveness in the frontrunner countries than in other African countries.Chapter VI most positive evaluations (table VI. p. 1996). businesses appeared by and large to have found the competition or anti-trust policy frameworks in FDI frontrunner countries acceptable. with the exception of Botswana. One consequence of the complexity and nontransparency of regulatory frameworks is that foreign companies have to hire experts (typically ex-functionaries) to deal with the regulatory processes. 278).27 While privatization does not necessarily imply that foreigners are allowed to purchase stakes in the privatized enterprises. The countries surveyed in the Africa Competitiveness Report performed worse in terms of the effectiveness of antitrust policy -. FDI flows were also significantly associated with the privatization programme (Corporate Location 1998. Bureaucratic approval processes are often non-transparent. South Africa and the United Kingdom (SADC / FISCU. there was no major difference between the frontrunner group and others.VI. p. These include: • Non-transparency of decision-making processes.28 In the case of Mozambique. Complicated regulatory frameworks. that received a rather low assessment in both respects. about 50 per cent of the equity capital for privatization until 1998 came from foreign sources.22). 32 per cent (649) of the 2.another important policy that can have an impact on FDI (UNCTAD.29 (b) Business facilitation While almost all African countries have recently made efforts to facilitate business and reduce bureaucratic “red tape”. resulting in the payment of fees that represent additional costs for the investor. the FDI frontrunners appear to have made the most progress in this respect. annex table A. 1998a. Survey data in the African Competitiveness Report 1998 suggest that. 58). • 183 . 1997b. p.A). 1998. Mozambique and Ghana were the most active in privatization in the group of FDI frontrunners. 1997a) -.040 privatization transactions undertaken in sub-Saharan Africa before 1997 are accounted for by the six subSaharan frontrunner countries (World Bank. 26 Compared to the slow speed of privatization at least in sub-Saharan Africa. In Uganda.3). its absence virtually eliminates the possibility of FDI in many industries and countries. frustrating companies as they receive little information on how and when a formal approval process regarding their investment project will end. 187. All of the FDI frontrunner countries also received a positive evaluation from companies when it came to dividend remittance policies. Nonetheless.

Some countries (e. Mozambique and Uganda appear to have the biggest problems with corruption although Uganda in particular has made considerable improvements in recent years (ibid.35 Uganda’s agency for investment promotion received an award for being the best African investment promotion agency in 199736 and can compare.Tr World Investment Report 1998: Trends and Determinants • Costly and time-consuming licensing procedures. 1998.one of the most important factors influencing investment decisions in Africa (Sachs and Sievers. on average the frontrunner group appear to be less affected by this problem than the group of non-frontrunner countries featured in the Report. 36). Among the FDI frontrunner countries featured in the report.. 51). 1997b. successful investment promotion becomes a more important determinant for FDI in Africa as the countries on the continent improve with respect to the other determinants. p. The costs incurred by companies due to these administrative requirements can be significant.34 The investment promotion agencies in these countries also assist foreign investors in obtaining work permits and other licences and all have a process in place encouraging foreign investors to reinvest.) As to investment facilitation. 184 . 1998. Botswana.31 As to corruption. According to this Report . at least in some respects. 28). 1997b) had also established a one-stop shop for FDI by 1996. almost all frontrunner countries offered incentives for foreign investors. five of the eight frontrunner countries were represented in the top ten (Corporate Location.32 Finally.according to the survey results in the Africa Competitiveness Report 1998 -. Tunisia also shows up well compared with OECD countries (Kaufmann. even with the top agencies in the world. there is some evidence that most of the best agencies of this kind in Africa were located in the frontrunner group. It is important to note. in this connection. p.37 (c) Economic determinants The FDI frontrunners in Africa vary considerably as regards the economic determinants of FDI. that in general. Thus.39). at least 25 separate bureaucratic steps are needed. 1997. p. Namibia and Uganda) have installed offices of their investment promotion agencies overseas actively to promote themselves in major home countries of TNCs. although determinants themselves vary in importance according to type of investment. which constitutes -. according to a ranking of the best investment promotion agencies in Africa and the Middle East. To obtain an industrial licence that allows an investor to operate in Mozambique. guaranteed a time limit within which local authorities are obliged to complete screening processes and had programmes in place to train officials in developing a welcoming attitude vis-à-vis foreign investors. D. p. Almost all FDI frontrunner countries had established investment promotion agencies33 and all of the frontrunner countries that were included in UNCTAD’s survey of best-practice business promotion (UNCTAD. Botswana appears to have the lowest corruption level of all African countries and would even compare with the top half of the OECD countries in this respect. and at least some of the frontrunners have made considerable progress in the reduction of corruption. While it is difficult to compare the performance of investment-promotion activities and to judge when some of the success in attracting FDI can be attributed to a well-functioning investment promotion agency.g. countries successful in attracting FDI focus their efforts on certain TNCs and certain home countries of TNCs (UNCTAD.

1998. attracting FDI in that sector. 14). Ghana also received much of its FDI in the primary sector and even Tunisia attracted some FDI in the exploration of oilfields and the construction of a gas pipeline to export Algerian gas to Italy (El Hedi Lahouel. Africa has lost in attractiveness as a market.excluding countries that have received large inflows in the past as reflected by large FDI stock-. no country on the continent possesses industrial clusters of a considerable size. natural resources explain much of the FDI inflows into most of the frontrunner countries. 38 The very fact that there is a large number of natural-resource rich countries in Africa -. they are not. while recent GDP growth rates for Africa did not exceed an annual average of 2. 1997. agglomerations of companies in the same industry that could be attractive for foreign investors as providing a pool of a highly specialized experts or workers. Thus. In sum. the gross domestic product (GDP) of sub-Saharan Africa almost stagnated between 1980 ($293 billion) and 1995 ($297 billion) . there are few resources or assets. 39 Apart from natural resources and tourism. that African developing countries possess in sufficiently large quantities to attract FDI. natural resource extraction plays an important role in FDI in Africa and so it is not surprising that the majority of frontrunners are countries with economies dominated by primary products. while that of South. Since 1994. A survey among Australian mining companies on the ranking of different exploration and investment criteria for mining in Africa. at $338 million. that is. most of the frontrunner countries have put particular emphasis on creating an enabling regulatory environment for FDI in this sector. especially mineral resources. with a few exceptions such as Egypt or South Africa. but not sufficient on their own for. normally sufficient to explain success with respect to FDI in Africa. According to the respondents. put an “attractive geology” only in third place (Oestensson. Also. particularly for diamonds. 6). the largest Ghanaian gold mine and the first and only genuinely African firm to be listed on the New York and Toronto stock exchanges. South-East and South Asia as well as Latin America and the Caribbean more than doubled. such as specific technological knowhow. Market-seeking investment Overall. Resource-seeking Resource-seeking investment Perhaps more than in other developing regions. although large endowments of oil or other natural resources are helpful to attract investment. Equatorial Guinea receives FDI almost exclusively to exploit its rich oil and gas reserves. Botswana and Namibia have received significant FDI in mining.that received much less FDI than the frontrunners during 1992-1996.Chapter VI i. acknowledging that natural resources are often not sufficient by themselves to attract FDI. 33 per cent of the stock of Ashanti Goldfields. much lower than the average for all developing countries.5 per cent from 1991 to 1997. p. all FDI frontrunners showed 185 . by themselves. p. during the past two decades. are conducive to. ii. However. the average absolute FDI flows into the group of oil-producing African countries were. However. is held by the United Kingdombased company Lonrho. the granting of the right to mine a successful discovery as well as the guarantee of equitable profit repatriation were more important criteria for their investment decisions. However. as compared to the markets of other developing regions. For instance. highlights the fact that natural resource endowments.

are another area in which most of the frontrunners had attracted some market-seeking FDI.September 1997 only. all Africa a 2. dairy products (Business Map 1998.10). b 1997 data are for January . Other TNCs specializing in food processing.0 affiliates opening up in these countries are sometimes accompanied by investment in Sources : UNCTAD.5 7 290. a 1995-1997 b (Millions of dollars and percentage) Value Primary Primar y Agriculture Secondary Secondar y Manufacturing ertiar tiary Ter tiar y Building and construction Commerce Tourism Other services Total 20 20 75 75 88 14 5 3 67 183 1995 ercenta centag P er centa g e 11 11 41 41 48 8 3 1 36 100 Value 5 5 54 54 199 39 8 2 150 258 1996 ercenta centag P er centa g e a 2 2 21 21 77 15 3 1 58 100 Value 60 60 95 95 454 7 7 4 436 609 1997 ercenta centag P er centa g e 10 10 16 16 75 1 1 1 72 100 1995-1997 c ercenta centag Value Per centa g e 87 87 225 225 749 62 19 7 661 1 061 8 8 21 21 71 6 2 1 62 100 Source : UNCTAD. above-African average growth in real GDP (table VI.4 FDI in particular into SADC area.8 6 345. front-runner 1996 in recent FDI front-runner countries and all countries Average annual growth rates of real GDP.11.5 Ghana 4. have also invested in these expanding markets. pp. 1991-1997 (Per cent) GDP 1996 Country (Millions of dollars) The positive development in GDP growth has attracted some market-seeking Botswana 5. South African Banks such as Standard Bank have expanded their operations into SADC frontrunner countries. In the SADC region. unpublished data. 34. Equatorial Guinea 25. SADC/FISCU. the positive growth rates were at the same time a reason for the increased appeal of these emerging markets.8 3 107.5 19 485. for example. Botswana.0 Mozambique and Namibia have all received Mozambique 6.0 South African chain stores such as Shoprite Uganda 6. a food-processing activities. Ghana has received 60 per cent of its FDI inflows outside the primary sector since 1995 in services (table VI.0 4 995. Pep Stores or McCarthy. able avera annual gro verag Tab le VI. c Data are for September 1994-September 1997 only. in particular in beverages.0 6 179. IDC 1997. Note : figures are based on project approval data. 186 . While some of these are related to mining able inflows by industry Tab le VI. While the increasing FDI inflows might have contributed to this positive development. p.0 Tunisia 4.6 4 401. Africa: a vera g e ann ual gro wth rates of GDP. mainly through Namibia 4. 34.10. FDI inflows into Ghana b y sector and industr y. based on African Development Bank.4 FDI in the retail sector. 1998. real GDP. Retail Average. 23)). 1998. p.0 Checkers. 1991-1997 and GDP (current prices).Tr World Investment Report 1998: Trends and Determinants a strong. based on Ghana Investment Promotion Centre.11).40 Services. a Does not include mining and petroleum. Entries may not add up to totals due to rounding. and especially financial services.3 159. in Including South Africa.

other (frontrunner) countries have more difficulties to capitalize on their central location among a number of other countries: an example is Ghana. in which the frontrunners receive FDI (box VI.given the significant number of German speakers in the population of both countries -. (which employs 9 people) was founded because Namibia and South Africa are -. Although market-seeking investments are common in African countries with larger markets in terms of absolute size and higher GDP per capita levels like Tunisia. Africa as a location for market-seeking and efficiency-seeking FDI: the case of the ABC Bücherdienst GmbH in Namibia The ABC Bücherdienst GmbH launched its mail-order book business in 1991 in Regensburg. Access to a larger regional market has also been a factor in attracting FDI for some of the frontrunners. Sources: UNCTAD. the company began to sell books via the INTERNET and became Germany’s biggest on-line supplier of books. It is planned that it processes all e-mail transactions. 41 There are also some niche-markets. The recent acquisition of the ABC Bücherdienst GmbH by the Seattle-based Amazon. they are more noteworthy in the case of relatively small markets such as Namibia or Botswana or LDCs with a low purchasing power such as Mozambique or Uganda.2. an affinity for the country on the part of the management in Germany as well as incentives granted by the Government of Namibia in the framework of the country’s “export-processing entity” incentives programme. efficiency-seeking Box VI. In 1995.42 Hyundai and Volvo. the affiliate also helps to service the German market by processing customer requests during bank holidays in Germany and processing data related to the books offered by the company. The most recent of these affiliates . Additional factors influencing the decision to establish an affiliate in Namibia were the availability of German-speaking personnel. have both established their assembly plants in Botswana in order to deliver to the South African market and also to tap the emerging car markets of neighbouring Namibia and the Democratic Republic of the Congo (Corporate Location 1994. which has still to make progress on an integration arrangement.2). in particular to the South African market.may have consequences for the Namibian affiliate.com -.ABC Media Investments Ltd. not only delivers services to the local market but is also vertically integrated into the firm to reduce costs of personnel for servicing the German market.the world’s largest online book-order service -. As regional integration is less advanced in Africa outside of the SACU or even the SADC region. as the Namibian affiliate would also distribute literature in English. leading eventually to a considerable investment in English-speaking staff. The Namibian affiliate. Germany. for instance. the other important service industry was financial services. Germany. In early 1996. In particular. these included import concessions for computer hardware as well as public subsidies of up to 75 per cent for training courses for local employees.Chapter VI activities. in the ECOWAS region. based on information provided by the company and the Africa-Association in Hamburg. therefore. The Namibian affiliate’s main task is to service the company’s customers in Africa (mainly through e-mail). FDI in Namibia and Botswana seems to have been influenced by their membership of the Southern African Customs Union (SACU) through which they have free access to the South African markets. 187 .important markets for books sold by the company.9) .000 customers in more than 60 countries and employed 60 people. the company started to expand internationally by creating affiliates in the United States and Namibia. particularly in services. In the case of the ABC Bücherdienst GmbH. However. Kenya or Zimbabwe. In 1997. p. the company had approximately 100.

Egypt and. alongside the other countries mentioned. 44 Namibia and Tunisia among the frontrunner countries that have educational levels (as measured by school enrolment ratios) that were significantly higher than the African average (table VI. is of particular importance for transactionintensive activities such as manufacturing (as opposed to natural resource extraction and agriculture) (Collier. Lesotho -. Botswana and Namibia were among the top ten African countries. As for the education and skill level of the workforce. It is thus no surprise that this type of FDI is predominantly located in Mauritius and some North African countries where a relatively favourable policy environment has prevailed over a longer period of time so that the necessary conditions have been put in place. to some extent.). p. Tunisia. Morocco.e. conducive to investment as reflected in particular in infrastructure policies as well as in the quality of ancillary public services. 1998a. the lion’s share of these exports are destined for the European Union.Mauritius. 202).infrastructure facilities. has made transaction costs far greater in Africa than elsewhere in the world (Collier. These findings are supported by the results of the previously mentioned survey reported in the Africa Competitiveness Report 1998. an uncompetitive transport sector. Tunisia and Ghana were the only frontrunners that received relatively high marks on the quality of their telecommunication infrastructure (ibid. Efficiency-seeking FDI Except for Tunisia. With respect to overall transportation costs. Botswana. to the extent that it provides no evidence to indicate that the frontrunner countries were on average significantly better regarded by foreign investors in air transport. Namibia. Although there are no figures indicating what part of these exports is accounted for by foreign firms.1997).Tunisia has been able to build up a comparative advantage in some industries characterized by a high labour intensity such as textiles that typically attract efficiency-seeking FDI. none of the frontrunners owes its recent 188 . 1997).Tr World Investment Report 1998: Trends and Determinants Efficiency-seeking iii. except for Tunisia (and Botswana judging from its recent FDI in the automobile industry for servicing the South African market). the policy environment has not been conducive to manufacturing investment for a long time. to some extent. The combination of factors necessary to attract efficiency-seeking FDI -.is complex. supported by liberal trade policies and easy access to the markets of industrialized countries -. 1998. including most of the frontrunners. In many African countries. typically coupled with unreliable infrastructure facilities and neglected and overpriced telecommunication services. measured by some key indicators for infrastructure (table VI. a workforce with skills levels that allow for a timely and cost-efficient production and delivery of goods to overseas markets. another important factor in attracting efficiency-seeking FDI. none of the frontrunner countries has received efficiency-seeking FDI on a large scale. Like some other African countries -.12) only Tunisia and. it is again only Botswana. It had the highest share of manufacturing exports (more than 68 per cent) in total exports for all African countries in the period 1990-1994 and was able to increase its share in global exports in textiles and apparel (Sachs and Sievers.40). while Ghana. An investment-friendly environment. port facilities and inland waterways (WEF.43 Infrastructure facilities in most of the frontrunners are no better than in most of the non-frontrunner countries. Namibia stand out with values above the African average. only Tunisia. i. pp. Thus. Uganda and Mozambique received somewhat lower marks.12). has been particularly successful in attracting export-oriented FDI into its textile and apparel industries and establishing itself as a production location for these goods in the world market.

average 1991-1995 40 6 4 5 51 58 2 Road network: 1000 km road per 1 million persons.12.3 Source: UNCTAD. b Average. as these countries pursue policies to reduce their shortcomings in these areas. are not yet in place. but also attracted efficiency-seeking FDI. Ghana and also Uganda. annual average 1990 to most recent year a (dollars) 152. Considering that it takes time to improve on both of these fronts. however. Africa: selected indicator s of the le vel of education and infrastructure facilities in frontrunner for recent FDI frontrunner countries and f or all countries (Percentage and constant 1987 dollars) Government expenditure: real per capita education spending.. annual average 1990 to most recent year a -. 189 . However...9 6. primary level 1992-1993 (Per cent) 115 ..7 . Lessons The analysis has shown that even within this relatively small group of African countries a host of reasons can be seen to have allowed these countries to attract FDI in recent years: in the case of Equatorial Guinea it was mainly rich reserves in oil and gas accompanied by a reasonably stable political environment.7 78 33 . 1. 7 59 52 11 Telephone services availability (mainlines over 1000 persons).. Ghana.. there are already signs that they too can expect a larger amount of efficiency-seeking FDI in the future. Privatization has led to considerable FDI into Mozambique.Chapter VI success to attracting sizeable amounts of efficiency-seeking FDI.7 .6 2. in most cases. Finally. it is not surprising that countries like Mozambique and Uganda that have gone through devastating civil wars in their recent history trail other frontrunners as well as other African countries in this respect. 2. . 1985-1989. 60 134 118 67 School enrolment.. World Bank. a “Most recent year” refers.. Tunisia has not only attracted market-seeking FDI from investors seeking to explore its own market.....45 3. 1997a. . the conditions.. to 1996.. 18 2. Natural resource reserves also played a role in the case of Botswana. In most frontrunner countries.. in particular in the textile and apparel industry. 77. . Mozambique and Namibia.9 b Country/region Botswana Equatorial Guinea Ghana Mozambique Namibia Tunisia Uganda Average for all African countries School enrolment. 15. The diversity of the success stories analysed above suggests that the stereotype that African countries can be attractive for foreign investors only on the basis of their natural resources able indicators level Tab le VI. in particular as regards infrastructure and the skill level of the workforce. based on World Bank. in particular for those countries in Africa that have so far been less successful in attracting FDI? There is no single determinant that could explain by itself the recent relative success of the frontrunners. these countries have also received some market-seeking FDI fuelled by the relatively strong growth of their economies in recent years.7 .. 1997b. What are the lessons that can be drawn from this analysis.. secondary level 1992-1993 (Per cent) 57 .5 28.

As market-seeking investment is still probably lower in Africa than in other regions. In other words. where regional integration efforts to create a free-trade zone among the 15 member countries have attracted market-oriented FDI due to the prospective enlarged market. The fact that the frontrunner group countries had significantly higher GDP growth rates in the past ten years underlines the importance of growth-oriented policies. apart from the reduction in intraregional tariff and non-tariff barriers. The example of other regions shows that regional integration initiatives such as. but the experience of most of the frontrunners -with the exception of Equatorial Guinea -. Thus. finally. As most African countries have a comparatively small market size. since they not only increase foreign investors’ interest in a newly created large market. especially from the experience of Tunisia. countries that wish to follow the example of the more successful countries should provide foreign investors with a clear and reliable set of regulations and a comprehensive scheme for the protection of their invested capital. Integration efforts have to focus. is that countries that want to • • • • 190 . foreign investors could respond rapidly to the dynamics of economic development in a business-friendly environment. for example. There is evidence of some movement in this direction among frontrunner countries -. A stable and predictable framework regarding FDI also encourages foreign investors and. such integration arrangements could also lead to flows of FDI wanting to take advantage of intraregional division of labour similar to that in Asia. Although each country has to define its own strategy. but also foster the overall credibility of policy reforms. In the future. rich natural-resource endowments continue to be an important FDI determinant for many African countries. Privatization programmes are therefore a potential source for attracting FDI. Certainly.Tr World Investment Report 1998: Trends and Determinants is incorrect. some of the lessons that can be drawn from the example of the frontrunner countries apply to all countries regardless of their specific situations.shows that just relying on natural resources is not enough. the MERCOSUR can have a positive impact on FDI inflows. on the improvement of intraregional infrastructure facilities to link the often separated markets on the continent.46 Another lesson that can be drawn. The revitalization of other regional integration agreements in Africa could contribute to an increased inflow of FDI into an increasing number of countries in the continent. As elaborated above in section VI.in particular in the SADC area. • A stable and predictable policy and macroeconomic environment is an important factor in attracting FDI. All of the frontrunner countries have made remarkable progress in this respect. Mauritius and Morocco. regional integration efforts are critical in attracting more market-oriented foreign investors to Africa. Most of the frontrunner countries have at least made a beginning with privatization programmes.A. Africa still trails other regions in this respect. it would take a comprehensive approach that aims at improving investment conditions with respect to all of the determinants mentioned above to increase FDI flows to countries that have been less successful. a high degree of investment protection is a typical characteristic of countries that have been successful in attracting FDI. as well as other (non-frontrunner) countries receiving significant efficiency-seeking investments such as Egypt.

particularly at the primary and secondary levels. The agencies of all SADC countries met in Centurion. representing significant disincentives for export-oriented foreign firms in these industries. revenues from the mining industry are strategically invested to build up human capital in the country in order to make the country attractive to other kinds of investment. the facility of a one-stop shop that gives foreign companies quick and non-bureaucratic assistance in all aspects of their investment projects. 39). Some frontrunner countries have therefore already started to use revenues deriving from the extraction of these resources to fund the creation of other assets. In the case of Botswana.Chapter VI attract efficiency-oriented investment should reinforce their efforts to improve the education available to their citizens. As African countries step up their efforts to integrate their markets. that putting effort into improving investment promotion activities can yield increases in FDI inflows provided that determinants in other areas are also improving.with the most successful agencies in developing as well as in developed countries and. facilities for conducting business and economic factors that foreign investors find appealing. these countries stand out among African countries. the recent performance of the group of frontrunners discussed here shows that being located in Africa per se does not rule out success in attracting foreign firms. if they wish to sustain their recent performance over a longer time. All successful countries possess an investment promotion agency that also has. • While natural resources have been among the main determinants for the attraction of FDI to almost all of the frontrunners. A first step in this direction is currently undertaken by the investment promotion agencies of SADC. In many of the successful African countries. African investment promotion agencies have still to adopt world-standard best practices. What is required is that countries offer a combination of policies. favourable trade policies have also played an important role in attracting foreign companies into most of the frontrunner countries. a simplification of national regulations can make a contribution to reducing the scope of corruption. • • Even though Africa as a whole has been less successful than other regions in attracting FDI. 40).at least in some aspects -. p. deregulation was paired with intense investment promotion activities. on 26 June 1998 to form a SADC Committee of Investment Promotion Agencies. some face the problem of sustaining such flows over a longer time as natural resources are limited in the long run. 1998. they should also join forces in investment promotion. Such agencies as the Uganda Investment Authority have shown that African agencies can compare -. “African governments that ignore corruption do so at serious peril to their economies. moreover. South Africa. with high tariff barriers on imports as well as exports. As to corruption. in many cases. *** 191 . in particular. In addition to a well-educated labour force and a relatively well-developed infrastructure. In investment promotion. and to the attractiveness of their countries as hosts for FDI” (Sachs and Sievers. p. in manufacturing industries and especially in the apparel and textile industries (Sachs and Sievers. The lessons outlined above are relevant for other countries that seek to increase inward FDI as well as for the frontrunners themselves. In fact. While corruption is a complex phenomenon and often difficult to tackle. 1998. the majority of which have pursued restrictive trade policies for a long time.

. Its principal aim.investors’ perception of the investment condition in a country often take some time to change. 192 .47 The same could hold true for other industries and with respect to other developed countries’ markets. In addition to further measures at the domestic level. the reduction of trade barriers for goods and services produced in Africa could contribute to enhancing FDI both directly and indirectly in many African countries. Cote d’Ivoire. Additionally.3). debt relief could help to reduce the pressure on the foreign exchange regimes in these countries and contribute to the relaxation of exchange restrictions in connection with FDI. there is also a need for initiatives on the part of the international community to improve investment conditions in Africa. the SADC region countries play an important role as trade partners and investment locations for German companies: in 1997. The Southern Africa Initiative of German Business In May 1996. and the Association of German Chambers of Industry and Commerce (DIHT) -. more than 70 per cent of German FDI stock in Africa had been accumulated in the region by the end of 1995. as agreed by three leading German Business Associations -. Nigeria. with the Republic of South Africa as the most prominent host country.Tr World Investment Report 1998: Trends and Determinants In sum. historically the development process in Africa has been constrained by factors on the supply side. Box VI. Appropriate measures at the overall political and macroeconomic levels have to be undertaken to improve the basic determinants of FDI. efforts to attract FDI have to include initiatives in a number of areas. measures by home country governments and business organizations to promote investment by domestic firms in Africa could be enhanced (box VI. /. if they could have quota-free and duty-free status. Federation of German Industries (BDI). as African countries strengthen their capabilities. Botswana. Malawi. Tanzania and Zambia all stand a chance of developing a textile and apparel industry capable of competing in the United States market.48 Since many African countries remain heavily indebted.. The fact that there are a number of African countries that have improved their policies but do not fall among the frontrunners analysed in this section not only suggests that one has to allow for some time for the policy changes and their effects to show results in terms of a sizeable increase in absolute FDI inflows (some of the frontrunners are only starting to become major recipients of FDI in Africa) as -. Economic links have been accompanied by development of strong political ties between the SADC member states and Germany.3. Cameroon. policies designed to attract foreign investment have to be based on a rigorous analysis of the strengths and weaknesses of a country on the basis of the determinants discussed above. as is being considered under the planned United States-Africa Growth and Opportunities Act. Although. in Africa. Technical assistance in the areas of basic education and technical training in the upgrading of infrastructure facilities could also make a contribution. the Southern Africa Initiative of German Business (SAFRI) was launched. Mozambique. Ghana. Debt relief is another measure that could improve investment conditions in Africa.Africa-Association (AfrikaVerein). Among African countries.among other things -.is to strengthen relations between the 14 member states of SADC and the German business community. about 30 per cent of German trade with Africa was done with the SADC countries. as everywhere else. thus contributing to an improved regulatory framework for FDI. Moreover. For instance. it also suggests that the measures mentioned above are not always enough for attracting FDI.

combined with political uncertainty. Differences in the FDI data for earlier years as reported by the SARB and the IMF derive from differences in the definition of FDI by the two institutions. SAFRI also considers vocational training schemes to set up SAFRI-sponsored training in the region. mean that Nigeria is losing attractiveness as a host country. essential improvements for the region cannot be expected in the short run. Source : UNCTAD. However. these measures are considered long-term investments by SAFRI. The organization of fairs and conferences as well as trips by company delegations to bring together potential business partners from Germany and SADC: the concept of SAFRI is based upon the assumption that personal contacts between individual entrepreneurs are pivotal for further establishing trade and investment relations. Active support of the privatization process in the region in order to improve further political and legal parameters for foreign investment and technology transfer. SAFRI also welcomes and supports intraregional liberalization efforts. as this nears completion. see UNCTAD 1998b. 193 . in particular the SADC initiative to create a free-trade zone among its member states by the year 2008. According to the IMF. SAFRI concentrates on some of the most pivotal factors for attracting FDI into the region. which have left income per capita below the level of 1978. these initiatives will be taken in accordance with agreements made with relevant SADC authorities. • • • With its emphasis on a good investment climate and an improvement in the human capital formation. However. concepts and visions (the first SAFRI-SADC private business conference will be held in October 1998). the International Monetary Fund in its balance-of-payment tapes publishes strikingly different figures for FDI inflows into South Africa in 1997. In order to facilitate business-to-business contacts between German and African counterparts. flows are expected to decline. based on information provided by the Africa-Association. the Africa-Association has established its “Africa Business Platform” . FDI inflows into South Africa fell for a second consecutive year. Since its foundation in the summer of 1996. Investment had been increasing in the Nigerian manufacturing sector in the late 1980s but the stagnation and then fall in Nigerian GDP per capita since 1993.a virtual market-place on the Internet that enables visitors from all over the world to make contact with German companies doing business with and in Africa. as this could increase the region’s attractiveness for market. For an analysis of recent developments in the least developed economies in Africa.and resource-seeking investors. forthcoming. Notes 1 2 3 4 Much of the FDI inflow into Lesotho in recent years has been for the development of the Lesotho Highlands Project. SAFRI has had broad media coverage both in Germany and the SADC states and provides a good example of increasing private sector initiatives to promote interest in Africa as a business location.3. the data set for 1997 from the South African Reserve Bank (SARB) used in this chapter represent a revised version of the data as provided in the balance-of-payment tapes by the International Monetary Fund (IMF).Chapter VI (Box VI. meant that the expected return to investment in the oil industry was reduced. concluded) SAFRI’s activities include: • A human resource development initiative for the SADC region: SAFRI organizes business-oriented panels that bring together entrepreneurs from southern Africa and Germany for an exchange of ideas. A weaker demand and lower price for oil were (correctly) forecast as being among the effects of the Asian crisis and the 30 per cent fall in the price of oil.

p. These countries are Angola.8 billion in 1997 (Business Map. However. Seychelles. Egypt. Botswana. a country would only qualify if it had reached. rapid liberalization might lead companies that had undertaken investment to overcome the existing trade barriers to divest. Simonian. 15 achieved a GDP growth rate of 5 per cent or more in 1997 (United Nations. and M. The methodology used. Financial Times. It should be also emphasized that the analysis of the sectoral distribution of FDI flows to Africa as a whole suffers from the fact that data are scarce and that it has mainly to rely on the information provided by selected major home countries. FDI from China is a notable exception. “Privatization process is taking much longer than expected”. Hyperinflation in some civil-war-ravaged economies. 1998). p. in the period 1987-1991. These figures do not correspond to the figures by the South African Reserve Bank given in the text because of different definitions of FDI. Malaysian investors. Financial Times. has limitations: • One limitation of the method is that a country that already has a high ratio on a particular indicator might be excluded from the frontrunner group because that might make it more difficult for it to attain an above-average improvement. as trade liberalization in general does not always have immediate positive impact on FDI. Virtually the same indicators were used to identify frontrunners in UNCTAD. Also. that had become the second most important source of FDI inflows into South Africa in 1996 and 1997. an above-developing-country value. as well as drought-induced increases in food prices and wages in some countries. 12. the United Republic of Tanzania. In some cases. above-developing-country-average values for certain indicators. this may also indicate a lack of dynamism. p. The decline in the share of services in FDI into Africa in the period 1989 to 1996 is largely matched by an increase in the share of the category “unallocated” that includes holdings and other FDI in non-specified sectors that is not shown in figure VI. p. FDI unrelated to privatization accounted for inflows of $2. Lesotho. Democratic Republic of Congo. however. Thus. seem to have scaled down their plans for 1998 because of the Asian crisis (Business Map. Morocco and Nigeria. not exceeding $5 million (Fujita. Malawi.1 billion in 1996 and $1. although there are African countries that received almost no inflows in the period 1987-1991 but had slightly higher inflows in the period 1992-1996. However. Includes South Africa. a private source of information on FDI into South Africa. The survey criteria for the selection of companies changed during the period. Libyan Arab Jamahiriya. for at least one indicator. 1995b. Of the 38 countries that are regularly surveyed by the United Nations Department of Economic and Social Affairs. “Morocco to seek foreign investors”. 22 June 1998. 1998a. for instance. Mauritius. 14. Ashurst. Mozambique. p. However. Tony Hawkins. As of June 1998. suggesting that there is no systematic bias against countries that already had a high value for a particular indicator in the earlier period (1987-1991). In most cases. Africa with investment in Delta”. as explained. Chinese FDI stock is very limited. Khalaf. in “GM returns to S. SADC members are Angola. Swaziland. 14). Namibia. 1997. 20). Malaysian firms have been partners in Zimbabwe’s biggest power station and also in forestry (both in 1996). South Africa. are the main factors behind the rise in the inflation rate for 1997 (United Nations. 1998a. some of the frontrunners already had. Uganda was the only African country that recovered strongly enough from a situation where FDI inflows had almost ceased to fulfill the frontrunner requirements. Zambia and Zimbabwe. 3). 31 March 1998. Furthermore. 20). R.Tr World Investment Report 1998: Trends and Determinants 5 6 7 8 9 10 11 12 13 14 15 16 17 18 According to Business Map. Financial Times. 11 December 1997. even though absolute inflows may be low. p. There is some evidence to suggest that a rapid liberalization process in the framework of 19 20 194 . • A second factor to be considered is that a country that received virtually no flows in the period 19871991. H. the interlinkage between trade policies and FDI is ambiguous. like any other method to assess performance. as it spreads over 20 African countries.5. but received rapidly increasing flows in the second period (1992-1996) would have very high values for the growth rates on all of the four flow indicators described in the text. 1998. Egypt and Nigeria were the only African countries that received above-developing-country average flows during 19921996.

in Tunisia it takes 10 per cent of the senior manager’s time. p. The ranking was based on three performance criteria -. as reflected in relatively higher FDI stock indicators. DTTs are often only established between countries once there is a critical mass of foreign investment. No information was available on investment promotion in Equatorial Guinea. p. for a brief description of the FDI framework in Botswana see SADC / FISCU. and the overall competitiveness. FDI inflows have been largely associated with the privatization programme [. Namibia. total capital investment and the number of jobs created -.]” (Atingi-Ego and Kasekende. Equatorial Guinea and Namibia all accounted for very few privatization transactions. The assessment is based on a combination of the results of a questionnaire completed by a senior manager within the agency and the findings of a questionnaire completed by several representatives of organizations that advise investors and know how the agencies are perceived by investors (Tillett. The same holds true for the share of frontrunner countries in the value of the transaction. while Ghana was evaluated to be “quite open” and thus having reached the second highest category on the ERT benchmark.. regulations or permits.Chapter VI 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 adjustment programmes in some sub-Saharan countries may have contributed to divestment by foreign firms (Bennell 1997a. while the cost of the same procedure in the state of Maryland. Namibia. Tunisia and Uganda. Tunisia was one of the four top-ranked countries with “very open” investment conditions.. South Africa and Zimbabwe.the number of projects attracted. Morocco..were both evaluated as countries opening up in terms of their investment regulations with a high average speed in the period 1993 to 1996. while in Namibia and Botswana it takes only a small fraction of a senior executive’s time to negotiate with officials in obtaining licenses. The list of non-frontrunner countries that received a negative assessment on this point included a much longer list of countries such as Cameroon. However. In another survey conducted by the European Round Table of Industrialists (ERT. Mauritius. For a detailed analysis of the national FDI codes of Mozambique and Namibia see Mutharika (1997).135). Botswana has not yet signed the Paris Convention for the Protection of Industrial Property as administered by the World Intellectual Property Organization (WIPO). 1996. not all frontrunners were active in privatizing in the period until 1998. According to Atingi-Ego and Kasekende of the Bank of Uganda: “. 1998. The following analysis is based on the findings of the study and therefore refers only to Botswana. 1996. 1997). while in Ghana. Tunisia and Uganda. Tunisia and Uganda. 195 . Ghana. Tunisia does not have such programmes. Mozambique. the cost of obtaining a commercial registration for an investment of one million dollars in Mozambique can be up to $50. Namibia. 1998.Ghana and Tunisia -.) Thus. as a consequence of the Uruguay Round negotiations under the General Agreement on Tariffs and Trade (GATT). Malawi. Nigeria. ii). The “Best African Investment Promotion Agency Award” event is organized jointly each year by the company Corporate Location in collaboration with Coopers & Lybrand. Botswana. the resources of the investment promotion agency.. United States would be just $100 (IFC. 38). 1997b). market size and wealth of the country. According to the study. Cote d’Ivoire.22. The large number of privatizations in Mozambique is partially explained by the privatization of many small units and retail outlets (Bennell. Mozambique. Some of these countries have only recently started to push privatization forward more decisively. the two FDI frontrunner countries covered -. p.while taking into account the incentives offered to companies. It is not surprising that most of the frontrunners have concluded considerably fewer such treaties than non-frontrunners (like Egypt and Mauritius) that have a longer history of receiving FDI. The frontrunner countries included in the survey reported in the Africa Competitiveness Report 1998 are Botswana. Kenya. The countries were: Botswana. Ethiopia. p.000.3 billion in sub-Saharan Africa. The five frontrunner countries for which data are available accounted for $623 million or 27 per cent of the total privatization value of $2. Some of the tariff rates entered in the table might have changed significantly in recent years. more than 20 per cent of the executive’s time has to be devoted to these activities. Furthermore.

4). p. FDI in the automobile industry of Botswana. 23). Botswana has over the years pursued a stringent policy of raising educational levels in its population and workforce by using revenues from the diamond industry to enhance human resource development (Corporate Location. Thus. A further factor increasing the transaction costs is poor law enforcement. p. to cater for the South African market reflects the potential in that country for efficiency-oriented FDI. chapter 1. However. For a discussion on the potential role of debt relief in restoring self-sustained economic growth in subSaharan Africa. p. 1998. Other surveys confirm the crucial importance of an appropriate regulatory environment. pp. Namibia. there are also other theories to explain the poor performance of the manufacturing sector in Africa -. 22 June 1998. 1997). mentioned earlier. “High rates choke investment”. The urgency to make progress in the internal integration of African markets has to be seen also in the context of liberalization efforts vis-à-vis countries outside the continent. In this connection. 1998a. 16). The latter efforts can only come to full fruition for African countries if intra-African liberalization progresses more quickly than that with external partners. 1997.6).including the “Dutch disease” hyphothesis.VI. 41. 1998. The decision was significantly influenced by the plans of the South African and Mozambican Government for the Maputo Development Corridor. and consistency as well as constancy in minerals policies (Oestensson 1997. Corporate Location. Mitsubishi and the Government of Mozambique as a minor shareholder to build an aluminium smelter near the deep water port of Maputo. Lesotho. SACU members are Botswana. p.4). 127-130. p. the government-owned Industrial Development Corporation of South Africa. p. Part Two. 22). 1997.14. 1998. p. as there is evidence that this substantially increases the positive effects of integration for the participating countries as contrasted with just trade-based integration (Wangwe. including the reconstruction of the transport infrastructure between the Johannesburg/Gauteng area in South Africa and Maputo in Mozambique. apart from the “transaction costs” approach. Another example of this is South African Breweries setting up new facilities or acquiring existing ones in Mozambique and in Uganda (IDC. 1997. 26). Tunisia received significant inflows in the tourism industry. p. see UNCTAD. making other products less competitive (Collier. Tony Hawkins. It should be noted that. 196 .Tr World Investment Report 1998: Trends and Determinants 37 38 39 40 41 42 43 44 45 46 47 48 Tillett (1996) gives an overview of best practice indicators (annex table A. in Financial Times. policy makers need to be aware that regional integration efforts should encourage cross-border FDI within the region. highlighting the ability to repatriate profits. United States International Trade Commission 1997 as cited in Sachs and Sievers. Low electricity costs were another key factor (Corporate Location 1998.7 billion in investment by a consortium composed of South Africa’s Billiton. in particular developed countries. South Africa and Swaziland. Mozambique has attracted $1. the guaranteeing of management control. according to which the large exports of natural resources push the exchange rates of many African countries upwards. liberalized trade and investment between African countries and the European Union and the United States are likely to result predominantly in trade integration as opposed to investment integration as long as the markets of the individual African countries are largely separated from each other (Wangwe. a sector which is to a considerable extent just as location-bound as natural resource extraction.

an overwhelming proportion of the region’s inward FDI was directed to East and South-East Asia. a sharp increase in Thailand. FDI approvals for these five countries together increased from $29 197 . This is mainly because a number of major host countries in Asia have relatively large domestic economies and/or high ratios of domestic investment to income. of course. Malaysia and the Philippines.3). FDI varies as a proportion of both gross fixed capital formation and GDP. to Singapore and Taiwan Province of China by a total of some $5 billion in 1997 (figure VII. Even in the five Asian economies most affected by the crisis (Indonesia. The region accounted for 57 per cent of flows into developing countries and over half of their FDI stock. both the region’s FDI inflows as a percentage of gross fixed capital formation in 1994-1996 and its FDI stock as a percentage of gross domestic product (GDP) in 1996 were slightly lower than the corresponding averages for all developing countries (figures VII. Inflows to that subregion increased by 5 per cent over 1996 to a total of $78 billion. Furthermore. Within the region. However.2 and VII. Trends Despite the financial crisis affecting a number of East and South-East Asian economies. despite the financial crisis in Asia which erupted in July 1997 (UNCTAD. an increase of 17 per cent over 1996 (annex table B.1). overall inflows remained at a level similar to that of 1996.1). the Philippines and Thailand). and no change in the Republic of Korea (figure VII. The growth rate of FDI in 1997 was.3). however. 1998a). As in the past. There were moderate decreases in flows into Indonesia. The FDI stock in the region reached $596 billion in 1997. lower than that of the previous year (17 per cent).1). to a lesser extent. foreign direct investment (FDI) in Asia and the Pacific rose by about 8 per cent to an estimated $87 billion in 1997 (annex table B. led primarily by increased flows to China (figure VII. the Republic of Korea. This was largely because flows increased to China and.1). Malaysia.Chapter VII CHAPTER VII PA ASIA AND THE PACIFIC Trends A.

Ranked on the basis of the magnitude of FDI inflows in 1997. (See section B below for further discussion. FDI/TNC database. no doubt because it generally represents long-term interests in its host economies. 1996a). both of which declined sharply in 1997. it is worth noting that the share of FDI in total resource flows to East and South-East Asia has increased remarkably in recent years. FDI has become the single most important source of private development financing for the region. the performance of individual economies has varied: • As the frontrunner. for a number of reasons quite apart from any that might be related to the financial crisis (box VII.Tr World Investment Report 1998: Trends and Determinants billion in the first half of 1997 to $32 billion in the second half of 1997 (table VII.1).2).1).) In this context. Singapore. 198 . and since there has been a financial crisis in Asia which could have some spillover effects on China. With a slight increase to $10 billion in inflows in 1997 -. from 10 per cent in 1990 to 53 per cent in 1997 (World Bank. China (with new record inflows of $45 billion) again accounted for over a half of the flows into Asia and 11 per cent of the world total. It was second (after Singapore) among Asian countries in FDI flows relative to gross fixed capital formation in 1994-1996 (figure VII. China. a 1997 and flo ws to the boom will continue. even if it should decline to some extent in the short-to-medium term.twice as much as FDI flows to the entire African continent -- • Source : a UNCTAD. same economies. Within the overall trends in FDI flows into East and South-East Asia. The country continued to maintain its position as the second largest FDI recipient in the world and the single largest among developing countries. Republic of Korea. FDI was thus much less volatile than portfolio capital flows and commercial lending. 1998). and Taiwan Province of China) achieved a modest combined FDI growth of 6 per cent in 1997. the question Pacific: flows Figure VII. compared to 27 per cent in 1996.1. Flows into these economies taken together reached a record $17 billion in 1997. Indeed. 1996 Indications are that there may well be a decline in FDI flows. Asia and the Pacific: FDI flo ws into the arises as to whether the flows top 20 recipient economies. and is likely to be particularly important for the economies most affected by the crisis. Since China’s FDI boom has now lasted for six consecutive years. as predicted in 1996 (UNCTAD. The newly industrializing economies of Asia (Hong Kong.

those to Thailand increased by over a half.1). Figure VII. Flows into the other economies in South A s i a re m a i n l o w. although Thailand was the first Asian country to be stricken by the crisis. Flows into Hong Kong. the second largest recipient in South Asia. India’s potential for inward FDI remains sub-stantial. While flows into the other four declined. while flows into Taiwan Province of China increased. Asia and the Pacific: FDI inflo ws and outflo ws as a Pacific: inflows outflows percenta centag gross fixed formation. per centa g e of gr oss fix ed capital formation. the Philippines. 1994(annual avera verag 1996 (ann ual a vera g e) (Percentage) FDI flows to S o u t h A s i a ro s e t o another record level of about $4.2. Singapore also ranked at the top of the region’s countries in the ratio of FDI stock to GDP (figure VII. China and the Republic of Korea remained at a level similar to that of 1996. for example. mostly reflecting an increase of about 37 per cent in flows into India. India attracted $3. Source : a UNCTAD. and accounted f o r a b o u t t h re e quarters of total flows into the subregion. Top 20 economies ranked on the basis of the magnitude of FDI inflows as a percentage of gross fixed capital formation in 1994-1996. as compared with $3. Malaysia.Chapter VII Singapore remained the single largest recipient among the four economies and the second largest in the subregion (figure VII. • Total flows into Indonesia. a top 20 economies. 199 . FDI/TNC database. Thailand and Viet Nam (the “ASEAN 5") remained at a level similar to that in 1996. reflecting both the substantial flows it has sustained over time and the relatively small size of its economy.3 billion in 1997.3).4 billion in 1997. have remained stagnant for several years. less than the flows. their growth hampered by structural bottlenecks and a further slowdown in economic growth.3 billion in 1996. to Chile. Those to Pakistan.

such as petrochemicals. 200 .investment is lagging in the region. in Kazakhstan. FDI prospects for the short and medium term remain bright. The potential for FDI flows exists in a number of areas. Nevertheless. top 20 economies. 2 ) . investors from China and Indonesia concluded some large deals in early 1997.Tr World Investment Report 1998: Trends and Determinants FDI flows into the eight Central Asian economies increased for a fifth consecutive year. Top 20 economies ranked on the basis of the magnitude of inward FDI stock as a percentage of GDP in 1996. 1997c) -. While FDI was particularly attracted by the openness of the Central Asian economies.9 billion in 1997. other than oil and gas. in some countries. tourism and infrastructure.1 F l o w s i n t o We s t A s i a i n c re a s e d b y a multiple of six. the uncertainty in legal matters and. Nonetheless. the inconvertibility of currencies. FDI/TNC database. gas. accounting for nearly four-fifths of the total flows into the subregion.3. from a level of some $300 million in 1996 to 1. often attracted by privatization programmes. Source : a UNCTAD. the unreliable information on investment projects. The Republic of Korea was the largest investor in the region (although some divestment by Korean firms took place at the beginning of 1998) followed by the United States. agriculture and agroprocessing. Kazakhstan and Azerbaijan were by far the most important recipients. t h e p ro motion of intraregional j o i n t v e n t u re s a n d i m p ro v e m e n t s o f t h e FDI climate (UNCTAD. FDI flows into the region fell short of the levels of the early 1990s. 1996 a billion each to oil and natural gas projects. such as the low transparency of privatization programmes. Asia and the Pacific: inwar d and outward FDI stoc k as a committing over $4 percenta centag GDP. Most comprised resource-seeking FDI (oil. and despite active efforts by countries -through offset programmes ( b o x V I I . the United Kingdom and China. Even so. reaching $2. particularly in natural resources. ferrous and non-ferrous minerals). it still faces many problems.4 billion in 1997. Pacific: inward outward stock Figure VII. having turned positive (in 1996) after divestments exceeded investments in 1995. For example. per centa g e of GDP.

0 0.0 25.0 1.. 8. non-bank financial institutions and leasing.9 16.. East and South-East Asia China Share of the five most affected countries in total for South.6 21.2 4. Not including FDI in oil and gas. Chapter VII 201 .9 3. 1.8 10.2 1. .2 1.2 ——- 3.0 28.8 .1.3 7.5 58.8 1.9 1.2 2..6 Source: UNCTAD. 0.0 0.5 0.3 0.4 1.7 1.2 4..6 35. 7..4 0.8 .8 2. Republic of Malaysia d Philippines Thailand Total for the above countries 8.1 0.1 0.8 —— 16. 0.4 0.0 13..8 5.8 82. 1.0 2.6 5.2 0. banking..3 10.4 2.3 33.3 0.0 56.0 9.3 4.4 36.5 2..3 1.6 2. Preliminary data.5 3.1 10.8 0. 0.5 35.9 7.0 4.2 1..9 3..8 43. 0.8 7.0 8.2 47.3 1.4 0.7 —— 32..3 0.0 1.2 0.0 1.3 0..3 4.4 20.4 27.8 .3 .3 10.6 0.3 1.3 3.0 0.6 . 21.3 16.8 4.2 0.5 63.6 1. East and South-East Asia 20.6 b Memorandum: South.7 11. .8 19.1 3.1 —— 29. 0.5 1.7 33.5 2.0 2.1 1.8 0. .able inflows affected by first quarter Tab le VII.8 1. .5 . Manufacturing only.6 40.6 .8 5.2 .1 2.2 2.4 2. Republic of Malaysia Philippines Thailand Total for the above countries 1..2 6.7 1.5 17. insurance.2 4.3 0.3 4.3 3.5 1.7 2.4 .3 0. 0.8 0.8 6.4 45.2 2.2 22.3 1.5 2.8 66.0 22..9 5..3 0..1 6.2 2.fir st quar ter of 1998 (Billions of dollars) 1997 1990 1991 1992 1993 1994 1995 1996 1997 Q1 Q2 Q3 Q4 1998 Q1 Country Countr y a a (balance-of-payments (a) Actual FDI (balance-of-pa yments data) Indonesia Korea.3 16.4 6.7 6.3 0.7 5.5 8. FDI/TNC database.1 8.7 1.4 2..5 4. Appro (b) Appr oved FDI Indonesia c Korea.6 1.5 2. 1990.3 27.3 10.0 .8 77.8 4.3 23.. .3 1.5 2.4 —— 1. 10. a b c d Excluding reinvested earnings.3 —— —— 17.2 10.8 14.5 1. .1 1.5 1.2 1.0 0.4 —— 2.6 .. FDI inflo ws into the Asian countries most aff ected b y the financial crisis.6 16..6 .9 37 39.5 7.9 .1 3.6 61.8 2. .9 29.

and other light industrial products. The capacity of such industries to /. Experience suggests that increased approvals precede increases in actual FDI. from an average of 165 per cent in 1992-1993 to 17 per cent in 1994-1995. it declined further to 11 per cent. with inflows reaching $45 billion in 1997 (box figure 1).foreign and domestic -. Second. More importantly. This slowdown raises the question of whether the FDI boom in China is nearing its end. Source : UNCTAD FDI/TNC database. t h e r a t e o f g ro w t h o f F D I inflows has slowed in recent years. FDI in China’s industrial sector will be the first to be affected by worsening demand. considering the position of FDI in both gross fixed capital formation and GDP in China (among the highest in the world). to about 7 per cent. S l o w d o w n o f e c o n o m i c g ro w t h . GDP projections point to a further slowdown.the so-called “flying-geese” pattern (UNCTAD. in 1998 and 1999 (ADB. Share of China. First. H o w e v e r. such as some consumer electrical and electronics products. reduced economic growth in China can be expected to have a negative impact on FDI inflows. 1997 To the extent that FDI approvals are indicative. Assuming a lag as in the past between current approvals and f u t u re i m p l e m e n t a t i o n . including the country’s large and continuously growing domestic market. The relevance of this question is twofold. Is the current FDI boom in China over? China has experienced an unprecedented boom in FDI inflows over the past six years. in 1997. The boom has been fuelled by various factors. developments with respect to FDI in China will have a sizeable impact on FDI trends in Asia and the developing world generally. its export-oriented strategy and successful penetration of world markets.. 1995a. Various developments in pull and push factors for inward FDI in China suggest that such a prediction is plausible. a It may turn out that the massive -. would be depressed by weaker demand in China. Excess capacity . 1991-1997 F D I re g i m e . since China has become the single largest FDI recipient among developing countries and the second largest recipient worldwide (annex table B. FDI tends to be positively correlated with GDP growth. Although GDP growth has remained high in China (at 8. 202 . t h e d e c l i n e i n approvals by 20 per cent in 1996 and 30 per cent in 1997 may be followed by a decline in actual inflows in the short-to-medium term.. FDI flows into China.Tr World Investment Report 1998: Trends and Determinants Box VII. as well as the low level of FDI stock relative to the size of the economy until recently. t h e s p i l l o v e r e ff e c t s o f industrial upgrading in neighbouring economies -. the liberalization of its inwardBox figure 1. in particular. chapter V). Marketseeking FDI. it is below the double-digit growth of earlier years. textiles and clothing. they do suggest that actual flows may decline in the coming years. Box figure 2. a major change in FDI inflows may have wide-ranging consequences for the Chinese economy. 1998). falling from $111 billion in 1993 to $52 billion in 1997 (box figure 1).8 per cent in 1997). as approvals have been declining for some years. Source : UNCTAD FDI/TNC database.1 and box figure 2). and selected regions in world FDI inflows.1.investment of the recent past has resulted in excess capacity in a number of industries. Hence.

. As long as flows fluctuate around a relatively high level. however.. the demand for labour-intensive products in these markets is likely to decline if expectations of an economic slowdown in the world economy turn out to be correct. even if a host country continues to have a relatively high rate of economic growth.1. In addition. China. Singapore. in which FDI has been concentrated. continued) absorb further FDI inflows may thus be limited in the next few years. Although the financial crisis in Asia has not directly affected China. FDI in China has mainly come from within the Asian region. export growth is indeed likely to slow down. are eroding incentives for TNCs to establish labour-intensive export processing operations. to what extent the approvals in 1996-1997 will be realized.). For certain labour-intensive products. Japan. and if the country’s economic growth slows down considerably. Hong Kong. it cannot be expected that they will grow forever at the same rate. This suggests that the “gold rush” by investors into certain manufacturing industries in China may be coming to an end. given the current constraints on outward investment facing some of these countries. Thailand and Malaysia rank among the top investors. 1998). • • Wage increases. the Republic of Korea. If they are serious. established TNCs are likely to postpone sequential FDI unless a reasonable balance between demand and supply is restored. they contribute. It is questionable. in addition to foreign enterprises. to move to other low-income countries where transportation costs are lower and infrastructure more advanced than in China’s interior provinces. various structural weaknesses may come to the surface and erode investors’ confidence in the short and medium term. b With regard to total exports. It should be noted. representing additions to a stock of assets for production. The recession in Japan is of particular relevance here. to the increase in stocks and play an important role in the host economy (box table 1). Several factors have played a role in creating a new set of conditions. Reduced outward FDI from Asian neighbours . • • These problems could not only discourage efficiency-seeking FDI in China but also affect the country’s impressive export performance. A significant decline of flows from other Asian economies to China can thus be expected in 1998 (see section B). that FDI flows are an incremental measure. Despite special efforts by the Government. anti-dumping provisions. the potential of exporting from China is constrained by trade barriers in major export markets (import quotas. even though they remain internationally competitive.Chapter VII (Box VII. To sum up. In the short run. from which labour-intensive industries in China have benefited in the past. its indirect repercussions are as yet unclear. TNCs have preferred. Competition in the coastal area for sales in the domestic market is becoming more intense and. a decline in annual growth from 20 per cent in 1997 to 3 per cent in 1998 and 1999 has been forecast (ADB. et al. This could break the flying-geese pattern of industrialization in Asia. particularly in China’s coastal areas where FDI is concentrated. especially to the South-East Asian countries currently affected by the financial crisis. most investment went into labour-intensive export processing operations. a few domestic firms are emerging as strong competitors. however. FDI in China will probably decline in the short run. 203 . At the same time. /. China’s price competitiveness in international markets has been reduced vis-à-vis that of a number of South-East Asian countries which recently devalued their currencies. The pressure on profit rates stemming from excess capacity and increased competition could reduce the incentive for the latecomers among TNCs to undertake new FDI. Declining locational advantages for efficiency-seeking FDI . When China emerged as a major host country for FDI. Taiwan Province of China. TNCs’ relocation of investment from China’s coastal regions to the interior has not been significant. accounting for 80 per cent of China’s inward FDI stock. rather. other things being equal. This is true especially of industries in the coastal area. The share of these countries in approved FDI in China in 1996-1997 is also high.

8 46.8 17. On the one hand.8 Tax contribution as share of total (per cent) . These factors should also mitigate any slowdown that occurs in FDI in the short to medium term.2 27. The sources of future FDI inflows will probably shift to a certain extent. important promotion efforts include a comprehensive Investment Promotion Action Plan adopted at the second Asia-Europe summit meeting.0 .2 FDI inflows (billion dollars) 4.1 1993 27. 1997 45. 1991-1997 Item 1991 1992 11. The impor tance of FDI in China.5 13.1 17. and retail and wholesale trade.7 10.0 .4 FDI inflows as a ratio of gross domestic investment (per cent) 3.0 4.7 61.6 Exports by foreign affiliates (billion dollars) 12. the sectoral distribution and the mode of entry of FDI: • Decline of intraregional FDI. 1998). China’s growth performance is expected to be high by regional and world standards.9 31.0 1996 40. 1996).0 Number of employees in foreign affilliates (million) 4. reducing the role of firms from neighbouring Asian countries and increasing that of TNCs based in Europe and North America.5 41.0 18. Exports to these countries accounted for about 15 per cent of China’s total exports in 1996-1997. a b The growth of industrial production is expected to decline from 12 per cent in 1996 to 7 per cent in 1999 (ADB.6 34.6 17.2 7. FDI/ TNC database. Some industries closed to FDI in the past are being opened up gradually.0 10.4 20.4 7. liberalization is continuing in such service industries as telecommunications.0 .. Lower growth forecasts notwithstanding.3 13.0 24. The latter have traditionally been underrepresented (see section B. 75.0 16. figure VII. the Pacific island economies experienced a modest gain in FDI flows in 1997 after a sharp decline in 1996. concluded) Box table importance Box tab le 1.8 . The subregion experienced a negative growth rate of GDP in 1997 (ADB. governments of the European Union countries and the Asian countries have been actively promoting investment flows between the two continents.0 Share of industrial output by foreign affiliates in total industrial output (per cent) 5.5 9. banking and insurance. Furthermore.1 18. Ministry of Foreign Trade and Economic Corporation and UNCTAD. 1998) and the inflows of $400 million were still below the 1995 level of $600 million. 1995 35. New trends may be emerging in Asia and the Pacific with respect to the sources. 204 . their absorptive capacity for FDI is limited.. The current financial crisis provides some immediate opportunities for European firms to enter the Asian market or expand existing operations (Section B).8 17. in particular. the financial crisis in Asia has reduced the capacity of Asian TNCs. 17.. The liberalization of FDI policies is still under way. (Box VII.1 Share of expor ts by foreign affiliates in total exports (per cent) 17.0 14. 1994 33. electric power.16) in China as compared with other developing economies and can be expected to respond to available favourable investment opportunities.0 10.7 28.3 17. Furthermore. China can be expected to remain an attractive location for FDI.8 15. All these considerations mainly concern the short to medium-run FDI prospects.5 12.0 6.Tr World Investment Report 1998: Trends and Determinants Finally.2 On the other hand.0 41.. The share of FDI from outside the region is increasing in total FDI in Asia and the Pacific. are now taking an active interest in the region.1. Source: UNCTAD.. Source : UNCTAD. transportation. particularly those from Malaysia.3 14.. a significant potential exists for foreign investors to participate in building infrastructure and restructuring state-owned enterprises. based on information provided by China. Thailand and the Republic of Korea.7 11. having largely neglected Asia until recently (European Commission and UNCTAD.0 .9 FDI stock as a ratio of GDP (per cent) 5.4 6.2 25. European TNCs. Given the narrow production base characterizing the island economies. In the longer run.

this is because the sector is being liberalized. Thomson-CSF. The programme as originally conceived required foreign suppliers of arms and aircraft to make an investment in the buyer country amounting to an equivalent of about 30 per cent (exact figures depend on specific projects) of the technology-related products and services provided by them in return for the contract they obtained. a United States telecommunications firm. ($115 million). and cross-border M&A transactions as a percentage of FDI inflows reached 15 per cent (figure VII.under the Al Yamamah Economic Offset during 19881989. ($160-170 million). Institute of Middle Eastern Economies. particularly banking. as suggested by the presence of local partners in many of these investment projects. 1998). • Sectoral distribution. Similar examples exist for other supplier countries: a United Kingdom firm. The development strategies of some economies -Hong Kong. 1998f). 205 . Fryma Fabrics). these two companies made investments valued at about $600 million in five projects: Advanced Electronics Co. whether through unilateral initiatives or through the framework of international agreements.Chapter VII to invest elsewhere in the region. a company that won the contract for Peace Shield II and established Middle East Batteries Co. is to invest £1 billion in return for selling aircraft and has already established two out of seven proposed affiliates -. International Systems Engineering ($17 million). Source : UNCTAD. into the offset programme in 1994. The affiliates established are not necessarily confined to the arms industry (e. and Taiwan Province of China -.for attracting regional headquarters of TNCs and strengthening them as regional hubs have contributed to this process as well. a French defence company. in return. 1998). Offset programmes have now been expanded to include firms from other countries as well. Offset FDI is seen by the governments involved as a means to obtain technology. Middle East Propulsion Centre ($60 million in phase one and $118 million in phase two) (Japan. While this share is offset West Box VII. FDI through offset programmes in West Asia • Offset FDI programmes refer to programmes requiring foreign suppliers (exporters) of large volumes of specific goods and services to invest in the importing country. Majority M&A sales in Asia to foreigners in 1997 more than tripled in value over 1996 (from $4 billion to $13 billion). Aircraft Accessories & Components Co. Singapore.4). For example. under the Peace Shield Offset Programme. The number of host countries pursuing such programmes has also grown. moreover. This was confirmed by a survey of leading TNCs conducted by UNCTAD/ICC in March 1998 (UNCTAD. based on information provided by the Japan Institute of Middle Eastern Economies. and Aircraft Accessory and Component -.2. such as the United Kingdom and France. ($50-60 million). The first offset programme involved Boeing Aerospace and General Electric in Saudi Arabia. insurance and telecommunications. FDI in Saudi Arabia through this programme also came from Hughes (United States). The duration for undertaking the investment is about 7-10 years following the supplies of arms and aircraft. also has similar obligatory investment projects (Japan. Mode of entry.Saudi Development and Training Co. The restructuring of certain service industries in some of the countries affected by the crisis has also opened up opportunities to foreign investors. Al-Salam Aircraft Co. The first such programme was initiated in 1984 by Saudi Arabia and the United States.g. The governments that have offset programmes are. China. employment and a boost for the domestic private sector. Institute of Middle Eastern Economies. An increasing share of FDI flows to the region is directed towards the services sector. the programme in Saudi Arabia has been extended to the non-military area by bringing AT&T. expanding their scope. British Aerospace. In part. Mergers and acquisitions (M&As) are becoming more important as a mode of entry for FDI in Asia and not only in the economies most affected by the crisis.

1991-1997 (Billions of dollars and percentage) not seem very high when the trend in the share over several years in the 1990s is considered: in 1994. Singapore. Indonesia’s increased outflows were largely the result of a few large M&As that took place during the first half of the year.3 The expansion in China’s outflows was led mainly by resource- Source : UNCTAD. the share of M&As in total FDI inflows was 11. Outward FDI from Figure VII. the value of M&As as a percentage of FDI flows into developing Asia is very low if compared with that in developed countries (figure VII. reflecting industry structure. Indeed. Significant increases occurred in the 1997 outflows from China. M&As can. accounting for over half the total outflows from developing Asia. although it was still lower than its levels in 1994 and 1995. stronger technology-based competition and the need not only to exploit but to acquire created assets. The main home countries of outward-investing firms in the region were eight East and South-East Asian economies (figure VII. was by far the largest outward investor.5). Moreover. Cross-bor der M&As as a percenta g e of Cross-bor oss-border percenta centag West Asia was positive in 1997. 1996-1997 (Percentage) negative outflows in 1996. China has ranked among the top five outward investors in the world since 1993. Taiwan Province of China and. Republic of Korea. cr oss-bor der M&As and FDI flo ws. from inflows. Hong Kong. Note: the five most affected economies are Indonesia. based on the UNCTAD FDI/TNC database and role of M&As as a market-entry KPMG Corporate Finance database. vehicle. 206 . be expected to assume particular importance as firms respond to the restructuring taking place in the economies most affected by the financial crisis (section B). Outward FDI from Asia and the Pacific increased in 1997 by 9 per cent to $51 billion -an increase of 2 per cent. accounting for over four-fifths of the total outward stock from developing countries. FDI inflo ws. Indonesia (figure VII. the stronger the Source : UNCTAD.Tr World Investment Report 1998: Trends and Determinants almost four times higher than Pacific: Figure VII. it does cross-bor oss-border flows. Hong Kong.4. Asia and the Pacific: the relationship between it was the year before. of course. China. Malaysia. in particular.6).6). This suggests that the higher the level of development. The stock of outward FDI from the region reached $289 billion in 1997.5 per cent. the largest being an investment project in oil and gas in Kazakhstan. based on the UNCTAD FDI/TNC database and KPMG Corporate Finance database. Philippines and Thailand. for example.5.

with outflows to these regions decreasing by 69 and 37 per cent.Chapter VII seeking investments. with a total value of over $2 billion. Firms from the Republic of Korea in particular have either scaled down or postponed a large number of their planned investment projects in North America and Europe. although firms from China. the current financial crisis is likely to dampen both FDI flows into and outflows from the region in the short term. China. China. Greenfield investments remain the preferred mode of entry for most Asian TNCs. however. to China and the integration of the two economies. Malaysia and Singapore tend increasingly to resort to M&As. with large Pacific: outflows from Figure VII. Transnational corporations from these economies. in the crisis-affected countries of the region in the second half of 1997. China also increased its FDI significantly in South Africa. For the most part. Notably. Investment in the territory was further facilitated by the reversion of Hong Kong. Hong Kong. 1997. respectively (section B). firms from a Ranked on the basis of the magnitude of FDI outflows in 1997. affected directly by the crisis. with China continuing to be the single largest recipient of outward FDI from developing Asian economies and especially from Hong Kong. China remained an attractive location for investment by Chinese firms. slowed their pace of outward FDI because of the financial difficulties and structural problems confronting them. The growth of outward FDI on the part of Asian economies was. Singapore entered into a number of M&As. the extent of the dampening being determined by the speed with which the impact of the crisis is overcome. Asia’s outward FDI remains within the region. as bilateral relations between the two countries improved. FDI/TNC database. partly offset by a considerable reduction of outflows from Malaysia. absorbing nearly two-thirds of the total outflows in 1997. 207 . The next section analyses this impact in greater detail.6. Singapore also remained an active investor in Source : UNCTAD. *** Looking ahead. Asian investors are also among the most important in the lower-income and least developed Asian economies. so that Chinese firms found it progressively easier to establish a foothold in the territory as a springboard for outward expansion. Asia and the Pacific: FDI outflo ws fr om the top 15 investment projects in forest flows from economies a in 1997 and flo ws fr om the same economies in 1996 development in New Zealand and oil exploitation in Kazakhstan.Thailand and the Republic of Korea.

1997a).5 billion to $0. foreign portf tfolio Figure VII. 1998f.1. remained at a level similar to that of 1996 (figure VII. with portfolio equity investment falling by almost 90 per cent. reflecting the investor ’s lasting interest in these affiliates and control over them. managerial and intellectual capital that jointly represents a stock of assets for the production of goods and services.5 billion. on the other hand. networks of suppliers. This is not surprising. 1997a. However. in contrast. Republic of Korea. 208 . UNCTAD. while large amounts of short-term capital left these countries. Republic of Korea. FDI inflows in 1997 to the five most affected countries. its mobility is limited by such factors as physical assets. Malaysia. The crisis that ensued has affected the economies of the region in a number of ways (UNCTAD. Philippines and Thailand. resources. ESCAP. primarily on account of a steep fall in flows to Indonesia (table VII.5 billion. The financial crisis in Asia and FDI In the second half of 1997. is motivated primarily by a search for immediate financial gain and the time horizon for many bank lending decisions is also short term. FDI flows involve not only financial capital but also technological. Philippines and Thailand (figure VII. FDI flo ws. portfolio investments can cause flows. taken together.7). The behaviour of these two types of investment flows to the Asian economies most affected by the crisis is reminiscent of their behaviour during the crisis that struck Mexico in 1994-1995: total portfolio investment to Mexico fell by nearly 40 per cent. which had more than doubled in 1994.7) although they slowed considerably during the first quarter of 1998 when compared to the first quarter of 1997.Tr World Investment Report 1998: Trends and Determinants B. FDI/TNC database and Institute of International Finance.1). a 1994-1997 the real sector since such investments are a (Billions of dollars) significant source of productive resources. This short-term orientation may make these investment flows quite volatile at times (box I. Unlike FDI. Because of their volatility. created assets and competitiveness-enhancing efficiencies (chapter IV). human capital and the institutional environment. a sharp decrease in private external capital flows to some developing countries in the region. Much portfolio investment. among other things. chapter III) and may contribute to the emergence of bubbles (UNCTAD. FDI inflows remained positive and continued to add to the existing FDI stock. It has involved. from $4. Indeed. 4 FDI flows. Estimates. Since FDI is mainly a real investment in firms. portfolio investment is fully mobile at low cost. Source : a b UNCTAD. especially for developing countries. Net private foreign bank lending and portfolio equity investment were estimated to have turned negative in 1997 for the group of countries most affected by the crisis: Indonesia. fell by only 13 per cent in 1995. The flows are motivated by the strategic interests of TNCs that invest in host countries in their search for markets. 1998. turmoil erupted in the financial markets of some countries in East and South-East Asia. Indonesia. FDI stocks are generally not footloose. foreign por tf olio equity drastic disruptions in private capital flows flows foreign flo ws and f oreign bank lending to the during crises which may then spill over into affected by Asian countries most aff ected by the financial crisis. the local infrastructure. Malaysia. 1998). from $12 billion in 1994 to $7. They typically involve long-term relationships at the level of production between investors and their foreign affiliates.7.

thereby creating opportunities for FDI that is competitiveness-enhancing for TNCs. This is a relevant question because FDI plays an important role in the growth and development of Asian economies. including those most affected by the crisis.Chapter VII Even though FDI is more stable than portfolio investment. in the short and medium term. This raises the question of what the effects of the crisis are likely to be on FDI flows to and from Asia and. chapter IV). Implications for FDI into the most affected economies The most important locational determinants of FDI are the economic factors determining the prospects for TNCs to engage profitably in production activities (chapter IV). It then proceeds to discuss the implications of the crisis for outward FDI from the countries of the region and inward FDI to developing economies not directly affected by the crisis. Nevertheless. In particular. affected 1. the financial crisis and its economic consequences will affect FDI flows to these countries. such as high domestic savings rates and skilled and flexible human resources. If these factors are favourable. In conclusion. for all firms.2 and annex table B. The decrease is the result of exchange- 209 . the friendliness of the policy framework. they have built up fundamental strengths that make for long-term growth. of establishing and expanding production facilities in these countries. They have also substantially liberalized their FDI policies and taken steps to facilitate business.some in a manner conducive to attracting more FDI and others in a manner less favourable. first. because they are likely to influence some of the determinants of FDI -. It also accounts for a considerable share of exports in some industries (UNCTAD. it considers the possible overall impact of the crisis on FDI flows to Asian host countries in the short and medium term and the longterm FDI prospects of developing Asia. The extent and nature of any FDI will depend upon the precise combination of the economic opportunities available. to and from the most seriously affected economies. provided that the country’s policy framework allows them to do so. This section considers. in particular. the implications of the crisis for inward FDI into the five most affected economies in the region in the short and medium term on account of a number of changes resulting from the crisis. with the ratio of inward FDI flows to gross fixed capital formation ranging from about 5 per cent in Thailand to 12 per cent in Malaysia (figure VII. there is an inducement for TNCs to invest in a country. 1995a. Effects (a) Effects on FDI entry and expansion One reason why inflows of FDI to the crisis-affected countries could be expected to increase in the short and medium term is the decrease in the costs. All of these factors can be expected to remain favourable. The eruption of the financial crisis in East and South-East Asia has in fact changed a number of major FDI determinants. and the ease of doing business in a country. Among other things. The Asian countries most affected by the crisis have ranked high among developing host countries in the attractiveness of their economies to foreign investors. at least in the short and medium term. inward FDI provides a useful supplement to domestic investment. Maintaining and increasing the level of FDI flows to and within the region could therefore assist in the process of economic recovery in the region.5). it is not insensitive to crises and especially to changes in the determinants of investment induced by a crisis (chapter IV).

Moreover. as the crisis unfolded. Companies wishing to establish a Indonesia 231.VII. for example. Indeed. 210 .1) during the second half of 1997 and the first quarter of 1998. have reduced the foreign currency costs of acquiring fixed assets such as land. As a result.1 -48. a number of large M&As have already taken place in the five most affected countries since the turmoil began (annex table A.4 -58.4 -49. The currency devaluations that have occurred in the affected countries (table VII. Overall.Tr World Investment Report 1998: Trends and Determinants able Currency Tab le VII. according to preliminary data. for example.a rough measure of the price of acquisitions -. a especially if they react 100 basis points are equivalent to 1 per cent. quickly. In Thailand. Source : Ortiz. J ul y 1997 . led by firms from the United States and Singapore during the second half of 1997 (figure VII.VII.2 of their existing operations Thailand 87.4 373 seeking to increase the scale Philippines 51.0 -81. the current situation presents a unique opportunity to do so at lower than anticipated costs. lower hanges affected Jul uly February c hang es in the most aff ected economies.4 -25 may see in the crisis an opportunity for doing so.2. there were large increases in actual FDI flows into a number of industries (annex table A.Februar y 1998 property prices and more (Percentage) company assets offered for sale. for firms already planning to invest or expand their investments in Asia. no clear trend towards an increase in the total value of cross-border M&As in the five crisis-stricken countries taken together is discernible. provide opportunities for TNCs to undertake direct investments in the region through M&As involving host country firms. There is some evidence that this may be taking place: in Thailand. stock market prices -.9).plunged (table VII. Currenc y depreciation. the re-structuring of firms faced with large debt repayments and rising interest rates (table VII.1).2). buildings and capital goods manufactured locally.6 among individual host countries. as well as the lowered property prices.2). given the heavy Depreciation of the indebtedness of domestic currency vis-à-vis Change in the share Change in the dollar price index interest rates firms and their reduced Country (Per cent) (Per cent) (Basis points) a access to liquidity. fall in share prices and interest rate rate depreciations.8). However. 1998. combined with lower stock prices and a more liberal policy towards M&As. falling valuations of many Asian firms in the aftermath of the financial crisis have reduced the costs of acquiring firms.5).2).5 Indeed. foreign firms require much smaller resources in home country currencies to establish new production capacities or add to existing ones. substantial increases were evident only in the case of the Republic of Korea (figure VII. FDI flows into financial services tripled in 1997 in comparison with 1996 and flows in the first quarter of 1998 alone are 30 per cent higher than total flows in 1997 (annex table A. before recovery starts and the prices of assets and other productive resources rise again. so far. In addition. but higher than that for Asia as a whole (figure VII.VII.2) and their urgent need for funds.0 -63.7 2 398 presence in the region or Korea. Republic of 83. including firms that might otherwise go bankrupt.1 965 Malaysia 55. For example. the value of M&As as a percentage of FDI flows into the five most affected countries was relatively low as compared to that for Latin America.

a b y selected home economy. (box VII. As wages and other operating costs decrease in terms of Cross border Figure VII. in particular. FDI in such exporta Indonesia. 1997-1998 efficiency-seeking mobile foreign (Millions of dollars) investors might find it advantageous to invest in the affected economies. In any case. concerns are understandable. Cross bor der M&A sales in the five Asian countries foreign currency values. foreign control of large portions of any industry -. affected by by country most aff ected b y the financial crisis. Export-oriented FDI Currency devaluations can increase the attractiveness of the affected Asian economies to foreign investors by lowering the costs of production. Malaysia. as otherwise the prospects for a long-term partnership between foreign investors and host countries through FDI could be affected adversely.9.8 In Thailand. since they improve their international competitiveness vis-à-vis firms located in other countries that have not devalued. particularly when M&As seem like “fire sales” (Krugman. Republic of Korea. Cr oss border M&A pur c hases in the five Asian countries growing concerns over the affected by by economy most aff ected b y the financial crisis.7 Such advantages are particularly relevant for export-oriented foreign affiliates.Chapter VII Naturally. a may include bankruptcy Indonesia. for example. Philippines and Thailand. Data for the first half of 1998 are preliminary. Effects (b) Effects on TNC operations i. Malaysia. oriented industries as electrical 211 . Republic of Korea. Although M&As are generally regarded as less desirable than greenfield investments. Philippines and Thailand. are therefore viewed cautiously in a number of countries. there are Cross border purc Figure VII.or even small portions of key industries -. much depends on the specific circumstances and on the available alternatives.4). even though inflation might eventually eliminate the advantage.is often a sensitive issue in developed as well as developing countries. Sensitivities in this respect must be appreciated. Still. 1998). Source : data provided by KPMG Corporate Finance. loss of national control over (first 1997-1998 (fir st half) enterprises.8.3). Data for the first half of 1998 are preliminary. which Source : data provided by KPMG Corporate Finance. a by host countr y. especially as (Millions of dollars) there has been a noticeable increase in the value of M&As in which foreign firms acquired majority shares (figure VII. Hostile takeovers.

M&As may not lead to capital formation in the short run. 1995a). however. the M&A may have been instrumental in maintaining or revitalizing a host country’s capital formation. international M&As are also a phenomenon increasingly associated with the privatization of state enterprises and with the sales of bankrupt or near-bankrupt business units in various regions. New incremental or supplementary capital formation may then eventually occur in the form of both sequential and associated FDI which is larger than the original purchase (UNCTAD. 212 . • base. thereby decreasing the capital stock involved. For this reason. The private and public costs and benefits of cross-border M&As can also diverge significantly. it is necessarily accompanied by the transfer of foreign TNCs’ intangible assets such as technology and managerial skills. cross-border M&As are one form of FDI inflows. In contrast. employment may rise. 1997a). since the former immediately and directly adds to the existing industrial capacity in host countries. job reduction may ensue if an acquisition involves a troubled highcost firm that needs to be restructured and slimmed down. The corporate motivations for M&A deals vary and so do the effects of cross-border M&As for countries.. there are a host of possible long-term effects that also need to be taken into account in evaluating the relative merits of these two kinds of FDI. M&As would have no such positive employment effect in the short run. Viewed from a host country’s standpoint. whereas the latter merely transfers ownership of local assets from domestic to foreign interests. and greenfield FDI is normally preferred by host countries for this reason. by definition. of course. along with greenfield investments. This may be true as far as the immediate impact is concerned. Employment and the tax base Just as with capital accumulation. It is thus no surprise that special incentives are often given to greenfield FDI. 3. In general. accounting for about half the global FDI inflows in 1997. assuming that no viable domestic investment will take place in the absence of such FDI. These two types of inward FDI are often compared in their desirability for host countries. In the long run. Capital formation Greenfield FDI is. Furthermore.Tr World Investment Report 1998: Trends and Determinants Box VII. greenfield FDI immediately creates new jobs (assuming again the absence of credible domestic investment). assets that enable foreign TNCs to stay competitive relative to host country firms in the latter ’s own backyard. including Asia. if the acquired firm would otherwise have gone bankrupt. host governments are generally more interested in attracting greenfield FDI than in seeing existing local firms sold off to foreign TNCs. • formation. Furthermore. investment in new productive facilities. it immediately adds to the stock of capital in the host country. the danger that the acquisition may have been undertaken for the sole purpose of eliminating competition by eventually closing down the acquired firm (UNCTAD. in their eagerness to create employment opportunities and expand the tax base. M&As and greenfield investment: a comparison Cross-border M&As have been on the rise for some time. Greenfield projects are thus likely to result in new capital formation. It is argued that. But the acquirer may carry out modernization and capacity expansion (perhaps as a condition of the deal. if a TNC turns an acquired firm into a successful unit as part of its corporate network. the tax base is likely to expand more favourably under greenfield FDI than through M&As for the very reason that new business units are created by the former as additional taxable entities. other things being equal. /.. Hence. however. In addition to this short-term capital stock effect. greenfield FDI is more desirable than M&A FDI. There is. The immediate effect is merely an asset transfer from a host country owner to a foreign TNC. which are internalized/ embodied in their greenfield projects. as is usually the case with privatized state properties in developing countries and Central and Eastern Europe) or induce other related investments (perhaps other related FDI undertaken by suppliers). Although they are concentrated in the United States and Western Europe. both physical and human. In fact.

if a new owner revitalizes a moribund local firm. continued) Nonetheless. while M&As will not generate new competition in the short run. greenfield FDI and M&As are equally desirable alternatives. Greenfield FDI does not directly pose this problem but some greenfield ventures may be aimed at monitoring local technological progress. some countries may consider the broadcasting or film-making industry a cultural industry critical to the preservation of national traditions. there is no guarantee that greenfield FDI necessarily opens up new industrial sectors. depending on whether it might have gone bankrupt in the absence of the acquisition or on the effectiveness with which it handles new infusions of capital and technology under foreign ownership. unless the acquired firm itself later diversifies.g. industrial knowledge) in new fields. • • • 213 . Since M&As mostly involve transfers of existing productive assets. In addition.. On the other hand. Similar considerations apply with respect to national sentiment and culture. it is conceivable that an acquired firm will end up contributing as much or more to the local tax base. however. For example.3.Chapter VII (Box VII. Political and cultural considerations Since M&As involve the transfer of ownership of a local productive activity and assets. Supplementary resources Both M&As and greenfield FDI can bring in some critical supplementary resources such as new managerial. If the acquired units become integrated with the foreign TNCs’ corporate systems. although the chances of structural diversification are probably greater in greenfield FDI than in M&As. considerations. In developed countries with flexible exchange rates. a national security issue arises when local assets (e. Partial M&A deals may also occur to secure a minimum level of liquidity. injection). It all depends upon the nature of the industry involved. this “foreign reserves” rationale hardly exists. Besides. the intra-corporate supplementing of local assets with /. thereby contributing to industrial diversification in the local economy. precisely because both the governments and the local firms are desperately in need of liquidity.. obviously. In contrast. the market power of the new entrant. they are not likely to help a host economy diversify into new industrial activities. For example. greenfield FDI is not an alternative to M&As from the point of view of the individual enterprise. Liquidity (new capital injection) FDI is often welcomed because it brings liquidity. Structural diversification From a host country’s point of view. the takeover might reduce global competition as well as competition in the host country. local competition will be revitalized as well. Competition Market competition is desirable because it stimulates and improves efficiency. The new owners of local firms may apply new techniques to make their acquired businesses profitable. if the acquired firms might have gone out of business in the absence of a deal. FDI is desirable in part because it may bring new assets (e. • diversification. if the acquiring firm were part of a small number of firms at the global level. In some developing countries. technology) have military applications and can thus damage national security if they fall into foreign hands.g. on the other hand. • resources. Competition. and the characteristics of the host countries themselves. Here. In terms of national liquidity considerations. Liquidity is usually a priority for any country that experiences a balance-of-payments crisis and is in dire need of foreign exchange. whether in the form of foreign exchange at the national level or in the form of needed funds at the company level. Greenfield FDI can enhance local competition if its superior assets/market power are harnessed in such a way as to prevent predatory practices and to attract competitors. founders may want to sell because they wish to retire or some young start-up ventures may reach a point where they need additional capital. Only a company-level need for liquidity may arise. they may have an opportunity to move into new fields. however. they can maintain the level of competition that prevailed before. the sales of local businesses to foreign firms can become important. M&As are also often motivated by the desire to capture synergies by combining sets of corporate assets between the deal-making parties. resulting in lower prices for consumers. production and marketing techniques that are lacking in host countries.

Depending upon specific circumstances and the policy priorities of host countries. concluded) foreign assets is a possibility unique to cross-border M&As. *** So which is better from a host country’s point of view? “It all depends” is the appropriate answer. Indeed. A prime example of such greenfield FDI is NUMMI (New United Motor Manufacturing Incorporated).VII. 9 In making or expanding FDI in export-oriented production. in the United States. as is the case with some asset-seeking FDI. The Daimler-Chrysler merger and the VW-Rolls Royce merger are examples. Hence. foreign firms may be the only possible suitors. M&As can enable local firms directly to become parts of transnational corporate systems with a number of competitiveness-enhancing advantages. A specific example is Seagate. In such a case. 1998. Being part of a TNC system therefore gives affiliates “privileged” access to the TNC system. In these corporate systems. TNCs can draw on their international production systems which can serve as channels to reach markets and access inputs. This source of gain is important. or switching the output of production from the domestic to the international market. In fact. non-performing local businesses. These units need to be sold off.3.VII. since the ownership-specific advantages they internalize are supposed to be superior to their local counterparts if such FDI is to succeed.4).1). It may even cause a reverse transfer. an M&A results in the draining of resources (e. particularly if the new owner ’s intention is to siphon off knowledge from the acquired firm to the new owners. a joint venture between GM and Toyota. Source : Ozawa. This in turn offers a strong motivation for foreign affiliates to take advantage of the lower costs of production following devaluation. Synergy-creating M&As certainly add to both the host and home countries’ stock of resources and may bring both public and private benefits. In many cases. which has served as a learning conduit for GM in flexible manufacturing.Tr World Investment Report 1998: Trends and Determinants appliances and electronics has risen considerably (annex table A. Something very similar had happened in Mexico after the Peso crisis. 1996a). one or the other may be preferable.g. an M&A may not involve any transfer of new resources from the acquiring foreign firm. when FDI in export-oriented manufacturing and assembly of electrical and electronic equipment more than doubled in 1995 over the previous year (annex table A. (Box VII. for they have to be acquired by or merged into other firms if they are to avoid their ever-accumulating losses or debts and eventual demise. In contrast. 214 . Similarly. They need transfusions of both new capital and new managerial resources to survive and prosper. especially when dealing with distressed. In these cases. when it comes to distressed local business units. if not entirely then at least partially. They require immediate and direct transfusions of new capital and supplementary resources at the firm level. which has expanded its operations in Malaysia to serve the European market (box VII. the requirement is simply a buyer. simply because they may themselves be short of capital and deficient in technological resources.3). or to affiliates of the same parent firm in other countries. these existing businesses cannot be purchased and upgraded by domestic firms. greenfield FDI is likely to transplant supplementary resources at the national level. whether foreign or domestic. technology) from host countries. about one-third of world trade consists of such “intra-firm” trade. the upshot is an augmentation of the host country’s resource base. At the individual firm level. whether privately or publicly owned. intermediate goods and tradable services produced by an affiliate in one country are exported to the parent firm. a market in itself. and to markets located elsewhere (UNCTAD.

Faced with worldwide excess capacity. 1996a). To the extent that data for Japanese and United States foreign affiliates in the most affected countries are indicative.10 Technology echnology. as the single largest exporter in Thailand. Export propensities of United States majority-owned foreign affiliates in manufacturing as a whole have been considerably higher for the five most affected countries as a group (42 per cent in 1995) than for Latin America (26 per cent in 1995). the Asia-Pacific region contributes about 15-17 per cent of the company’s worldwide sales revenues. in the case of Japan. its exports accounted for 4 per cent of the country’s GDP during the past few years (TDRI. ranging (for United States majority-owned affiliates) from 14 per cent in the Republic of Korea to 57 per cent in Malaysia and Thailand in 1995 (table VII. with nearly $7 billion in revenues for its 1997-1998 fiscal year. Sunday Times . restructuring and the Asian crisis: Seagate Technology. which account for over four-fifths of its output. However. accessing. and the downsizing of its worldwide sales and administrative functions. 1998). 1998g. largely on account of the slump in global computer prices and the consequent cost of restructuring. the competitiveness of the Clomnel plant was weakened. The company reported a loss for the fiscal year 1997/1998. Inc. TNCs. reaching 69 per cent and 82 per cent in the case of United States affiliates in Thailand and the Philippines. Seagate restructured its global operations in late 1997. and experienced currency losses because of the devaluations of the Thai baht and the Malaysian ringgit. It also postponed the expansion of its production facilities for a read-write head plant in Springtown in Ireland. Seagate Technology. Increasingly. aiming at enhancing its competitive position through improvements in productivity and reduction of costs. while its revenues in Europe fell. Seagate was affected by the Asian financial crisis both in production and sales. The Irish Times . 14 December 1997. June 1998. b As part of the restructuring. pp. c The company therefore decided to use the surplus capacity at its plants in Asia to service European markets. Box VII.4. Ireland. a Its sales revenues in Asia for the first quarter of 1998 remained at a level similar to that in the previous quarter. It has also been the engine driving the exports of electronic products from Malaysia and Thailand. the negative effects of the crisis on its Asian operations are not as obvious as the effects of other economic factors. a b c d Seagate. is a leading provider of technology and of products for storing. Based in the United States. which had been opened only in 1995. Overall. the consolidation of its domestic media operations. and closely followed by United States TNCs (UNCTAD. these also include small and medium-sized firms which.8 million grant to the Irish authorities.drive industry. weak demand. TNCs have already had relatively high export propensities in most instances. Seagate announced in December 1997 that it would close a plant in Clomnel.Chapter VII Many corporate systems of integrated international production already exist in Asia. 1998. and managing information. Inc. press release. the company has the vast majority of its production facilities located in Asia. As a result of the devaluation of Asian currencies. 1993b). with sales in the ASEAN region constituting a major portion. The restructuring included the closure of certain manufacturing facilities. Seagate. the consolidation of its five disk-drive product design centres in the United States into three. which had previously been supplied by the Clomnel plant. Foreign affiliates in industries such as electrical machinery have had even higher export propensities in some countries. led by Japanese TNCs.3). 31-32). technological advances that have intensified competition. based on information obtained from various sources. 13 December 1998. the emergence of newcomers and intense pricing pressures in the disk. laying off 1. Annual Report . account for more than a half of the country’s outward FDI in numbers of projects (UNCTAD. d Source : UNCTAD. Production costs in Ireland became almost three times those in the affected countries in Asia. although their share of FDI in dollar value is much lower (UNCTAD. 215 .400 employees and paying back a $15.

0 39..a part of their production to foreign markets: exports increased both in absolute terms and as a percentage of total production. 1.0 10. the less import-dependent they are.0 4. both absolutely and relatively to total production.0 4. but the more foreign affiliates can draw on backward linkages with local enterprises. The most immediate implications of the currency realignment has been that some TNCs are shifting orders from factories from other countries in the region to their affiliates in the most affected countries.0 2. The impact of the current crisis could therefore be mitigated somewhat for a number of the most affected Asian countries because international integration at the level of production allows TNCs (and firms linked to them) to compensate for declining domestic sales through increased exports spurred by devaluation. as did the fact that foreign automobile affiliates in Mexico were already producing at internationally competitive quality standards. Ministry of International Trade and Industry.7).0 19.4).0 Philippines . on the strategies of firms.. 27. 25.0 .. for example. 40. 1998.. and United States. from 58 per cent in 1994 to 86 per cent in 1995 (annex table A.0 All 5 countries . access to the large North American market in the context of NAFTA and buoyant demand conditions also helped. 1.. 1. expects to increase its exports of motor vehicles.Tr World Investment Report 1998: Trends and Determinants Being part of TNC networks also makes it easier for firms to switch from domestic sales to exports.1 25. Honda is shifting some production activities from Japan to its facilities in Thailand (box VII. Moreover.0 d 8. as could be seen during the Mexican crisis of December 1994-1995.0 82.5).0 34. Naturally. 42. 216 .0 .sometimes within a few months -. a number of foreign affiliates reacted to the slump in domestic demand by switching -.0 . able Export propensity Tab le VII.. Department of Commerce.0 . 2. Expor ts as a percentage of total sales.0 Source: a b c d UNCTAD. of course.5 70. Data for the Republic of Korea are not available. . In the case of the Mexican automobile industry..9 18. the extent of the cost advantages enjoyed by export-oriented firms varies among industries and firms and is determined in part by their import-dependence.6). 57. Philippines. Whether and to what extent this potential is realized depends.3 35.. as well as substantially to increase exports of parts and components (box VII. Petroleum only. This further underlines the importance of integrating foreign affiliates into their host economies: such integration not only contributes to the building up of local capacities. and Thailand c combined 76.0 6. 1995 affected by (Percentage) United States affiliates b Republic of Korea 14.0 2.0 .0 51. Malaysia.0 65.. Expor t propensity a of Japanese and United States affiliates in the Asian countries most aff ected by the financial crisis..1998a.3. Majority-owned foreign affiliates only.0 51. .0 14.0 6. For example.9 Sector/ industr y Primary Manufacturing Chemicals Electrical machinery Transpor t equipment Ser vices All industries Japanese affiliates in Indonesia.7 8.0 Thailand .0 . 57.VII. Survey data for Thailand also indicate plans ) for increased exports by some foreign affiliates (box VII.0 40. There are signs that some Asian TNCs are also switching some of their sales from domestic to export markets.0 46. Toyota.0 Malaysia .0 69..9 Indonesia 79.. based on Japan.

Total vehicle sales in April 1998 dropped to 11.8 litre Corolla launched in January 1998 because sales (less than 400 units per month) do not justify the investment. in order to improve further the quality and competitiveness of its production in Thailand. Toyota’s response to the Asian crisis: changes in production and exports from Thailand.800 in 1998. The company then began to expand the volume of exports of assembled vehicles and parts to some countries (Indonesia.Chapter VII Toyota’ oyota’s Box VII. and plants for the production of components. and jobs previously done by outside subcontractors. It also involves reducing the number of employees through an early retirement scheme for factory workers.000 units. The expansion of exports is evident in the box table below. it resumed near-normal production schedules at both of its assembly plants in Thailand. including a significant reduction in demand in the local economy and a dramatic depreciation of currency. mostly pick-up trucks. it increased inventory of certain parts used in vehicles for export and undertook some additional maintenance of its facilities. On 5 November 1997. it began exporting diesel engines to Japan from Thailand for the first time.000-70. Toyota announced that it was planning to increase production. Laos. (Toyota Motor Thailand is expected to sell only 60. The continued slump has forced Toyota to revise its production. Pakistan and Portugal) to which it had already been exporting prior to the crisis. To help its parts suppliers survive. while dealers have received a credit extension from Toyota Motor Thailand. Malaysia.) Because /. Even though the total production of assembled vehicles is expected to decline in 1998 because of the fall in demand within Thailand. marketing. as compared with 15. 217 . production was partly resumed. the parent company had to inject an additional capital of 4. increasing the latter ’s registered capital to 4. which was originally planned for the third quarter of 1998. In addition. principally to serve the domestic market in that country but also to export to other countries inside and outside the region. each producing two of Toyota’s passenger or commercial vehicle models. engine blocks and camshafts. Toyota’s facilities in Thailand include two plants for the assembly of vehicles.000 million baht into Toyota Motor Thailand. and the value of exports of components was expected to increase from about $50 million in 1997 to about $96 million in 1998. Toyota has also taken advantage of the redundant capacity resulting from the crisis to provide a six-month training term at the Japanese headquarters to 50 production-team employees of its Thai affiliate. Partly for this reason. The changes in production levels and the shares of output for the domestic and export markets during 1997-1998 illustrate how a TNC can respond to rapidly changing economic conditions. Toyota Motor Thailand has accepted price increases ranging from 6 per cent to 20 per cent and is providing preshipment payments.5.000 units in 1998 including exports. which compares projections for 1997 with 1996 levels of exports and production. During the following few weeks it made small changes in the production processes -. On 7 January 1998. Further substantial increases in exports of both vehicles and components are expected by the end of 1998. Altogether. increased production capacity in Thailand in the 1990s. Toyota is also postponing indefinitely a model change for its pick-up trucks. and employment plans once again. however.5 billion baht in June 1998. In mid-November.600 in 1997 to 4.000 units a year. Within a few weeks.. New Zealand. the number of vehicles for export is expected to increase from 1. Car sales continued to decline as expected in Thailand during the first four months of 1998.. Some workers have been sent to Japan. especially for export. 1997-1998 Toyota Motor Corporation. which is crucial if the local factories are to achieve their minimum production volume of 100. such as initial quality surveys.200 units in December 1997. will now be done in-house. Toyota Motor Corporation is helping Toyota Motor Thailand to develop export markets. Toyota halted production in two of its Thai plants because of declining demand. one of the first TNCs to establish operations in the automotive industry of Thailand.for instance. Thailand’s car market is reported to have shrunk by more than 70 per cent since September 1997. The new plan calls for a temporary halt in the production of the new 1. The capital increase also allows Toyota Leasing to provide financing support for car buyers. including diesel engines.

5. expor by xports forecasts for Box tab le . which is in turn expected to revise its production.Tr World Investment Report 1998: Trends and Determinants (Box VII. Toyota Motor Corporation has used its financial strength to help solve the immediate liquidity problems of Toyota Motor Thailand. how firms are responding and how they view future prospects: • In 1997. b y industr y: sur ve y results Total number of firms responding Revenue increased Revenue reduced (Per cent) a Agriculture and agricultural products Mining metal and ceramics Light industry Metal productions machinery and transport equipment Electronic products and electrical appliances Chemical paper and plastic Services and infrastructure Total 9 15 19 55 59 46 19 222 78 33 53 35 37 52 42 43 11 47 32 40 34 26 37 34 11 20 15 25 29 22 21 23 Remain unchanged Sector/industry Source : a Thailand. Toyota Motor Corporation is able to shift towards a larger share of exports in its production in Thailand in quick response to the crisis. 43 per cent of all respondents enjoyed an increase in revenues. affiliates’ Box VII. Implications of the financial crisis for foreign affiliates’ operations: survey results for Thailand An annual survey covering foreign affiliates in all industries in Thailand was conducted by the Thai Board of Investment a in early 1998 to provide insights. into how the crisis has affected foreign affiliates. press release of 8 December 1997. light industry and chemicals. among other things. machinery and transport equipment faced reduced revenues than in agricultural products.6 60 000 4 800 8.. and paper and plastics. while 34 per cent experienced reduced revenues (box table).0 -37 000 units +3 200 units 47 3 89 7 +$42 million +$4 million Source: Toyota Motor Corporation. metal and ceramics. Board of Investment. At the same time. concluded) of its global production system that includes parts production and vehicle assembly facilities in many countries. metal products. and additional information provided to UNCTAD. 218 . erformance foreign by industry: surve vey Box tab le . 1997. P roduction and e xpor ts b y To yota Motor Thailand in 1997 and f orecasts f or 1998 Item Assembled vehicles (units) Total production Total exports Total exports as percentage of production Automotive parts and components Exports (million dollars) Diesel engines Engine blocks and camshafts 1997 1998 (forecast) Change (1997-1998) 97 000 1 600 1. Box table Perf le.. Percentage of respondents indicating a particular response. There is considerable variation among industries: more firms in mining. marketing and employment plans so that it becomes leaner and can maintain its competitive edge. /. Perf ormance of foreign affiliates in Thailand.6. Box table Pr le.

• The measures to be taken in the future to deal with the economic crisis are more or less the same as those taken over the past months.Chapter VII (Box VII. T h e (Percentage) industries with the most ambitious investmente x p a n s i o n p l a n s a re e l e c t ro n i c s a n d e l e c t r i c a l a p p l i a n c e s . • Box figure 1. metal and ceramics reduced the number of their employees. The most important one is cost reduction. mining. machinery and transport equipment — 24 per cent. Two-thirds of the respondent companies had been operating in Thailand for more than five years. 219 . of which 236 firms (40 per cent) responded. n e a r l y h a l f t h e respondents reported turning to the use of domestic raw materials in place of imported inputs. chemicals. The industrial breakdown of the respondents was: agriculture and agricultural products — 4 per cent. Board of Investment. more than half the responding companies do not plan to expand their investments in 1998.6. Over 60 per cent of the respondent companies indicated that exports in dollar value were expected to increase (box figure 1). Board of Investment. Many firms suffering from the decline in the domestic market have resorted to overseas markets. In the light of the economic recession that has set in following the crisis. with only 5. M o re o v e r. A m o n g o t h e r m e a s u re s . • • Thailand. with only 1 per cent of respondents indicating such plans (box figure 2). Finally. followed by Taiwanese and United States' investors. The trend towards increased exports appears to be gaining momentum in 1998. Most of them are mediumand large-scale firms. although Thai exports have gained greater price competitiveness thanks to a weaker baht. More firms will resort to currency hedging to protect themselves from baht fluctuation. The majority (58 per cent) of the respondents were Japanese companies.1 per cent of the respondents reporting such an action. 38 per cent still have Box figure 2. Two-thirds of respondent companies exported more than 20 per cent of their production. metal products. the . electronic products and appliances were at the other end of the spectrum. t h e p e rc e n t a g e o f f i r m s planning to shift production to other countries is quite small. paper and plastics — 21 per cent. Other problems include the decline in domestic demand and the financial liquidity crunch. continued) • Exports of many companies have been increasing in value since 1997. light industry — 9 per cent. Questionnaires were sent to 592 foreign affiliates operating in Thailand. stable. Most companies alleviated their crisis-related problems by reducing production costs such as transportation. Source: a Percentage of respondents indicating reduced. Foreign affiliates in Thailand: affiliates changes in export value in terms of dollars survey results (Percentage) a Source : a Thailand. S e e k i n g n e w e x p o r t m a r k e t s p re s e n t e d another important solution. 47 per cent of firms in mining. fluctuation in the value of the baht has been a major concern among foreign investors (slightly over a half of the respondents). with 29 per cent of them having more than Bt 1 billion in asset value. electronic products and electrical appliances — 26 per cent. or increased expor ts in 1997 and expected changes in 1998. However. metals and ceramics — 7 per cent. and service and infrastructure — 9 per cent. Investment plans of plans to invest more in Thailand as labour costs and TNCs in Thailand i n v e s t m e n t i n c e n t i v e s re m a i n a t t r a c t i v e . Some laid off employees. packaging and stock.

Box VII. an automobile parts manufacturer affiliated to Honda Motor Co. TNCs’ response to the crisis: the electrical and electronics industry in Malaysia The electrical and electronics industry in Malaysia is dominated by TNCs. 1998).. most of which are parts manufacturers. Europe and the Asia-Pacific countries (excluding Japan). Only onesixth are self-financing from sales and profits. 24 March 1998. 24 March 1998.16 billion will be used to double the capital base of its Thai affiliates. with a view to obtaining an understanding of the impact of the crisis on FDI and TNC activities in this key industry. The plan starts with parts production and then proceeds to car and motorcycle manufacturing. a Showa Corp. plans to raise its stake in a joint shock-absorber venture in Thailand from 49 per cent to 53 per cent by doubling the capital of the affiliate. accounting for two-thirds of total manufactured exports in 1997 (Malaysia. Bank Negara. There are currently over 100 sizeable electrical and electronics foreign affiliates in Malaysia. of which Bt 2. /. In addition. although some Japanese and Asian firms use the ringgit. The industry grew by 14 per cent in 1997 (Malaysia. 8. Most of the respondents service their debt in dollars. negotiating for a price reduction of completely-knocked-down imported units from its Japanese parent.. Honda has 27 subsidiaries in Thailand. Other measures include increasing local content in its Thai automobile production. stimulated mainly by global demand for semiconductors. Furthermore. A survey of foreign affiliates in the industry was carried out by UNCTAD between April and May 1998. The Nation . The relocation plan envisages the use of existing facilities without new investments. The programme is expected to benefit more than 20 parts producers in Thailand in which Honda has a stake. The remainder will be used to purchase those Honda Car Manufacturing (Thailand) shares not fully subscribed by Honda. TNCs’ response to the Asian crisis: the case of Honda in Thailand In the wake of the financial crisis. The relocation of parts production. the cheaper baht has accelerated Honda’s restructuring programme to relocate production to Thailand. b Honda is also working on a plan to boost automotive parts exports from Thailand... Bank Negara. It has been able to increase exports back to Japan and to outside the region. but also boosted their parent firms’ equity share in their affiliates at a cheaper price than might have been possible in normal times. It is also the country’s single largest foreign exchange earner.7. 1998). a The results of the survey are as follows: Financing and financial transactions • A majority of the foreign affiliates surveyed depend on offshore sources of financing. as illustrated by Honda’s relocation programme. Source : a b UNCTAD. The crisis has also acted as a catalyst in this restructuring of global production by automobile TNCs. and cutting expenditures.Tr World Investment Report 1998: Trends and Determinants Box VII. The Nation . Honda’s production facilities in Japan are to cease producing some parts and to transfer the responsibility to its Thai affiliates. Honda Motors of Japan plans to inject 600 million baht into its cash-strapped parts supply subsidiaries in Thailand to boost their capital during the liquidity crunch. boosting exports and injecting capital into its affiliates are a few of the measures Honda has adopted in response to the financial crisis in Thailand. Honda’s parent company has decided to inject three billion baht into its Thai holding company. some leading Japanese automobile makers and their parts producers have been injecting capital into their affiliates located in the most affected countries. Local banks are used mainly for day-to-day local transactions. • 220 . This has not only helped the affiliates to deal with their financial problems. particularly from the United States.

There are. Source : a UNCTAD survey. however. but the impact does not appear to be significant.8. To sum up. assembly and testing. 221 . Others felt they would remain at the present level. has been adversely affected by the crisis and by the current economic slowdown in Japan. because FDI in the electrical and electronic industry is mostly exportoriented. Coping with the crisis • Almost all of the respondents see cost reduction as a priority arising from the crisis. Some consumer electronic firms (28 per cent) have adopted a wait-and-see attitude towards the crisis.7 billion) comprised a large proportion of the industry in 1997. the impact of sourcing through dollar-bought imports has not been critical. one-fifth of the affiliates do not repatriate profits to their parent firm. however. future Expectations of futur e performance • Despite the crisis. Some of them see the current crisis as an opportunity for expansion.6) industries that are more export-oriented have been less affected by the crisis than other industries. the firms surveyed have positive expectations regarding various production parameters. None of the respondents suggested that they would decline significantly. be it by export-oriented foreign affiliates or by domestic firms: the principal export markets in other parts of the world need to remain open to exports from the affected Asian countries and. This is particularly important since demand in the Asian regional market as a whole. • Plans for investment or expansion • None of the foreign affiliates surveyed intended to close down or relocate elsewhere. Since most foreign affiliates export more than a half of their output. In the meantime. Responses were obtained from 20 major TNCs with manufacturing facilities in the electrical and electronic industry in Malaysia. the ups and downs of the global electrical and electronic industry represent more of a challenge than the domestic or subregional economic upheavals such as the one now affecting Malaysia. concluded) • The dollar is the currency required to pay for principal inputs.8) and Thailand (box VII. Most of the TNCs surveyed utilize Malaysia as a base for component manufacturing. important preconditions that need to be fulfilled if increased export competitiveness is to be effectively exploited. The total value of output from these affiliates (about $5. through dividend payments from the Malaysian affiliate to a parent company. which has been absorbing increasing shares of exports from within the region. (Box VII. In addition. Half of the respondents see some opportunities to expand Malaysian operations in the wake of the crisis.Chapter VII Survey data suggest also that in Malaysia (box VII. improvements in efficiency and marketing are seen as necessary for coping with the crisis. Profit repatriations are normally made in ringgit. partly due to the fact that some of their products target domestic and/or regional markets. Hence the devaluation has affected the cost of production. However. demand in these markets needs to remain strong enough to absorb additional imports. some of the TNCs have more than one plant. More than 60 per cent expressed the view that production. there is some negative impact on the operations of foreign affiliates in the electrical and electronics industry of Malaysia resulting from the economic turmoil. sales and exports will increase in the next three years. equally important. The surveyed companies still have confidence in Malaysia as a destination for FDI and are optimistic about the next three years.

where the combination of the recent liberalization and the availability of assets for acquisition would suggest an increase in FDI inflows. The UNCTAD/ICC global survey The UNCTAD Secretariat and the International Chamber of Commerce (ICC) jointly conducted a survey of large TNCs in February-March 1998 (UNCTAD and ICC. The survey covered 500 companies.9).VII.11).Tr World Investment Report 1998: Trends and Determinants ii. A total of 198 firms responded to the survey. 1998f). the world’s 50 largest TNCs (not including banking and finance companies) headquartered in developing countries. and telecommunication.VII. Nevertheless. for a response rate of 40 per cent. According to a survey conducted by UNCTAD and ICC (box VII. These included the world’s 100 largest TNCs (not including banking and finance companies) in foreign assets.10).VII. drawn from the list of such corporations published in UNCTAD’s World Investment Report 1997 .11). Breakdown of responses to the questionnaire by main sector Source : UNCTAD. scaling down or postponement of FDI in the most affected countries and perhaps elsewhere in the region.1) and is expected to fall significantly in construction and civil engineering in the Republic of Korea (box VII. the largest increases in FDI are expected to take place in consulting services (box VII. Breakdown of responses to the questionnaire by home region Box figure. These include banking. The aim was to ascertain the companies’ intentions with respect to FDI in the short-to-medium term in East and South-East Asia in the light of the financial crisis and their opinions regarding the long-term prospects for the region as an investment destination. and 100 additional firms with significant operations in Asia. drawn from the list of such corporations prepared for UNCTAD’s World Investment Report 1997 . Reduced demand and slower growth can be expected to lead to some cancelling.1). 1998. FDI could increase. 222 .5) obviously has some adverse consequences for foreign affiliates producing for sale in local and regional markets. 200 companies that were potential candidates for inclusion in that list. UNCTAD/ICC Box VII. 50 companies that were potential candidates for inclusion in that list. Domestic-market-oriented FDI The downturn in domestic demand in Asia (annex table A. Foreign affiliates in the services sector are particularly susceptible to local demand conditions because of the non-tradability of most services. FDI declined in real estate in Thailand (annex table A. This is precisely what has happened in Thailand where FDI in financial services tripled in 1997 and in the first quarter of 1998 alone stood nearly a third higher than the total for 1997 (annex table A. The impact on domestically-oriented foreign affiliates varies among sectors and industries. UNCTAD. The composition of the sample in terms of countries/regions in which the respondents are located (“home regions”) and in terms of economic sectors is contained in the following two box figures: Box figure. In the Republic of Korea. insurance and other financial services. in certain service industries. expectations of reduced investment in the East and South-East Asian region in the short and medium term were reported most frequently for services: 18 per cent as compared to 12 per cent overall (box VII.9.

the low proportion may reflect the impaired capacity of some TNCs to Box figure 2. Predictably. they are now taking an active interest in this region. Box figure 3.10). In the case of the developing Asia TNCs. Short and medium-term prospects: company intentions by sector Source : UNCTAD/ICC global survey. March 1998 223 . in which TNCs figure prominently. The UNCTAD/ICC global survey: implications for FDI in Asia in the short and medium term The findings of the UNCTAD/ICC survey (box VII. Demand for passenger cars in the most affected economies has declined dramatically (figure VII. Short and medium-term prospects: company intentions by home region of parent company undertake outward FDI (most of which has traditionally gone to other developing countries). The automotive industry. is a good example of the impact of the crisis and the range of responses by firms. while firms from Europe are distinctly above it and those from developing Asia distinctly below it (box figure 2). In the case of European firms. this may well reflect the fact that. 69 per cent expect to maintain t h e i r i n v e s t m e n t a t t h e p re . Affiliates producing goods and services that depend mainly on domestic sources of raw materials and intermediate inputs would also be less affected than those relying on imports from countries whose exchange rates have changed little. firms in manufacturing from all re g i o n s h a v e t h e h i g h e s t p ro p o r t i o n o f responses indicating expected expansion of their FDI in Asia. However. 1996).Chapter VII Among manufacturing industries. N o r t h Box figure 1. Short and medium-term prospects: American and Japanese firms are close to overall response of companies worldwide this average.c r i s i s l e v e l . as compared to onefifth of service firms and less than one-tenth of primary sector firms (box figure 3).10. where considerable capacity UNCTAD/ICC Box VII. they remain committed to the region. foreign affiliates in light industries which produce non-luxury consumer goods are less likely to be affected than affiliates producing durable goods and luxury items.9) show that more than one-quarter of the responding firms expect to increase their FDI in East and South-East Asia as a whole in the short-tom e d i u m t e r m ( b o x f i g u re 1 ) . after having l a rg e l y n e g l e c t e d A s i a u n t i l re c e n t l y ( E u ro p e a n C o m m i s s i o n a n d U N C TA D . with over one-third of them providing this response.

the surveyed firms were p e s s i m i s t i c a b o u t t h e p ro s p e c t s f o r F D I i n shipping. Thailand. conducted jointly by UNCTAD and the Federation of Korean Industries (FKI).12 and GM scaled down its investment plans for a plant in Rayong.Tr World Investment Report 1998: Trends and Determinants VII. One-third of the 18 respondents from that industry to the UNCTAD/ICC survey indicated that they planned to postpone some of their investment projects and another one-sixth indicated a scaling down. Prospects for inward FDI in the advanced. had been built up. a n d t h e i r p ro d u c t s a re survey results internationally competitive. Box VII. given the serious stagnation in the real estate market. industries in which FDI grew rapidly prior to the crisis. Demand in the metals industry. and a number of automotive TNCs have scaled down. and the electrical and electronics industries.10. are likely to discourage growth of FDI in these industries.11. the consulting industry appears to be the brightest spot for FDI in the light of the financial crisis (box figure) -. Source : UNCTAD/FKI survey. Finally. 224 . these industries are Republic of Korea in the light of crisis. Domestic demand for these products is increasing rapidly and because national t e c h n o l o g i e s i n t h e i n d u s t r y a re re l a t i v e l y Box figure. Furthermore. FDI in the construction and civil engineering industries is expected to fall substantially.11. which produces basic production materials and intermediate goods. 25 November 1997. However. and a rapid fall in consumer spending in particular. Investment in (Points) trading services is also expected to increase as the import and export regulations have been substantially liberalized and will be further streamlined in the future. The predicted contraction of the economy in general. Prospects for inward FDI in various industries in the Republic of Korea The financial crisis is expected to influence the prospects for FDI in the Republic of Korea differently in different industries. Other areas expected to attract more FDI are the semiconductor and communication equipment industries. 1997: e x p o r t . April 1998. Passeng er car demand gr o wth. from Figure VII. a s c i t e d i n Financial Times . postponed or even cancelled investment projects in some of these countries. Passeng assenger gro 1997-1998 (Percentage) Source : S t a n d a r d a n d Po o r ' s D R I . Source : UNCTAD/FKI survey. may also drop p re c i p i t o u s l y d u e t o d e c re a s e d d o m e s t i c investment and demand and lower levels of production.11 Mazda closed a joint venture in the same country in July 1998. According to a survey of foreign affiliates in the Republic of Korea.presumably because the need for professional advice increases as the full-scale restructuring of domestic corporations begins and firms engage actively in M&As. Volvo scaled down output at its affiliate inThailand by suspending car production in late 1997.o r i e n t e d . April 1998. finance and insurance.

or sought to increase. Motorola intends actively to develop local suppliers and to provide overall support to them in technology. their investment in the most affected countries.1). d Source : a b c d UNCTAD. SUNS: South-North Development Monitor . is expected to involve a total investment of RM5 million. They also show that foreign affiliates are often in a better position than domestic firms to weather difficulties. a The investment is to be spread over two years. They show how TNCs can turn adverse effects to their advantage by strategic positioning. thus injecting funds to help its financially distressed affiliate as well as increasing its level of control over it (box VII. It also has another 500 local partners which supply and service the company’s daily factory maintenance. liquid crystal device. In January 1998. the Malaysian silicon valley to develop. Motorola is also planning to relocate its ASEAN regional headquarters to Malaysia. Exports are expected to account for more than 80 per cent of the company’s annual sales by 1999. The company also has an R&D centre in Malaysia.6) and/or increasing local content (boxes VII. this is reflected.12). Indonesia.7).000 units to 40. in the automobile industry as well as in other industries. among other things by the acquisition of assets. For example. compared to RM785 million in 1997. an increase from about 60 per cent expected for 1998. 24 January 1998. Motorola acquired in May 1998 a stake in Pantech. In Malaysia. 11 June 1998. the same companies sometimes increased. ibid. for example. switching production into exports (boxes VII.14 At the aggregate level. 1998). based upon information obtained from the media and Motorola. and GM and Ford were competing with each other and with domestic firms to acquire Kia. Motorola Malaysia expects to recruit 200 engineers by the year 2000.VII. 225 . and 80 to 90 per cent of its 12. Motorola is holding to its investment plans in Asia. in the fact that FDI flows into the automobile industry in Thailand remained relatively strong during the second half of 1997 and the first quarter of 1998 (annex table A. 13 Honda increased its share in Honda Thailand. At the same time. a Korean electronics firm. Motorola Malaysia is investing RM3. 15 May 1998.3 million in the first phase of its wastewater recycling project which would be using the latest “membrane technology”. New Straits Times .12. management and training. precision tooling. The company sources from more than 100 local suppliers: various types of components including semiconductor lead frames.7).7 and VII. VII. GM acquired an additional 40 per cent in General Motors Buana. becoming its second largest shareholder with 20 per cent equity. an example of the protective influence that Box VII.5. reaching a total value of RM1 billion in the year 2000. In addition. in which the company plan to recycle up to 40 per cent of current water usage from its plants. Pantech and Motorola plan to work together to develop Code Division Multiple Access (CDMA) digital cellular telephones.Chapter VII $750 million to $450 million (a reduction in planned capacity from 100. The Asian crisis and its implications for TNCs: the case of Motorola Despite the deterioration of economic conditions in some Asian markets and its negative impact on sales and profits. among other products.000 units) and postponed its implementation (TDRI. The project.000strong workforce in its five manufacturing facilities in Malaysia are expected to be Malaysian nationals. These examples illustrate both the risks and opportunities that the crisis entails for firms. Seoul. an automobile producer in the Republic of Korea. engineering plastic parts and packaging. Motorola plans to invest RM50 million in the Multimedia Super Corridor. Motorola Malaysia expects its annual purchases from its local component suppliers to increase. Motorola plans to invest $300 million in the Republic of Korea to expand its operations and set up new partnerships. smart cards based on the open systems architecture. TNCs also reacted by reallocating production from elsewhere to affiliates in the most seriously affected countries (box VII. New Straits Times . b As one of its measures to reduce costs. c In the Republic of Korea. repairs and operational requirements for each of its five manufacturing facilities in Malaysia. flexible circuit boards.

for example. There is a danger. Ministry of Finance and Economy. proposed activities to promote investment • Introduce an automatic approval system. For changes in the regulatory regime. In addition to unilateral measures and measures implemented in pursuit of multilateral commitments (such as. see annex table A. some countries have in recent months further liberalized their FDI regimes (annex table A. liberalization measures have also been taken in the context of the adjustment programmes linked to the package of financial support from the International Monetary Fund. is leading to an even more flexible attitude towards FDI in the region. At the regional level. At the interregional level. leaders able Republic Korea: Tab le VII. all of this helps to alleviate the immediate impact of the crisis. as well as high-level • Extend the tax concession period from the current 8 years to dialogue on key investment issues. Governments in the countries most affected by the crisis have also intensified their efforts to attract FDI both individually and collectively. a round table with business leaders and a business-to-business Offering incentives exchange programme. not only for investment but also for financing production operations and trade. • Taken together. For example. As a result.VII. ASEAN members are implementing their Plan of Action on Cooperation and Promotion of Investment and. at the second Asia-Europe Meeting (ASEM) in London in April 1998.”. Recent moves by the five most affected countries include opening industries like banking and other financial services to FDI and relaxing rules with respect to ownership. these liberalization moves and promotion efforts make the policy determinants of FDI in the most affected countries more favourable for foreign investors. 1998. Source : a Republic of Korea. and value-added service industries.6). 226 ..4). the Action Plan .. those made under the General Agreement on Trade in Services). 15 The Asia-Europe following programme will bea implemented in order to encourage FDI in the country: Investment Promotion Action Plan is focused on a number of activities under two broad Provisions of one-stop service headings: investment promotion and investment policies and regulations. in July 1998. Provide local government with greater autonomy when dealing with certain tax exemptions.Tr World Investment Report 1998: Trends and Determinants transnational corporate systems can spread over their affiliates. mode of entry and financing..7. information to investors. The • Streamline laws and regulations on FDI. the Republic of Korea has introduced an automatic approval system (table VII. Repub lic of Korea: major elements of the promotion programme FDI pr omotion programme “urged full and rapid implementation by all ASEM partners of the Trade Facilitation Action Plan and the Investment Promotion According to an announcement on 30 March 1998. combined with a recognition of the role that FDI can play in restoring growth and development. and Thailand has established a unit to assist foreign companies to bring expatriates to work in promoted projects. affecting (c) Regulatory changes affecting FDI The shortage of capital. • Korean Trade and Investment Promotion Agency (KOTRA) between and within the two regions include will be given full responsibility for the Republic of Korea’s a virtual exchange network to disseminate relationship with foreign investors. • Expand the range of tax exemptions to include high-tech. For countries. the heads of the ASEAN investment promotion agencies announced that the framework agreement to establish the ASEAN Investment Area would be submitted to Ministers for adoption late in 1998 (chapter III).4.VII.16 10 years.

Such borrowing appeared reasonable as long as various Asian currencies were pegged to the dollar. Like domestic borrowers. For the major Asian developing home economies taken together. especially since the crisis-affected economies have similar industries and demand structures. This could lead to market distortions and intensify incentives competition in the region (UNCTAD. b China. Implications for outward FDI Outward FDI by TNCs headquartered in developing Asia has increased substantially in recent years. For India. the greater proportion of its outward FDI is in China. as well as current FDI stocks in some cases. as compared to the 1996 list. Singapore. with the greatest proportion of such flows going to other countries in the region. further impairing their FDI potential. several large TNCs from developing Asian economies have experienced considerable losses of the value of their assets. De veloping Asia's a outward FDI stock. 227 . Taiwan Province of China.19 Substantial Developing outward Figure VII. The book value of the assets of a number of firms has fallen due to the drastic currency devaluations and the sharp fall of stock prices (see table VII. Higher interest rates in some Asian host countries encouraged dollardenominated borrowing. Data for Hong Kong. an additional six firms from that group of countries departed from the list in 1997. Malaysia. valuation losses may have increased.17 Of the 25 companies that have fallen the most in their ranking on the 1997 list. Asian TNCs that are mainly Asia-oriented face another possible source of loss if they have relied on borrowed funds denominated in dollars. by stock. FDI/TNC database. The financial crisis is likely to reduce both the capacities and the incentives of a number of Asian TNCs to undertake FDI. The impact is much more pronounced for Asian TNCs than for investors from other regions. India. This applies both to parent firms and their affiliates in affected countries within the region. In 1996. 2.11. four newcomers on the 500 list were from the most affected economies. Debt burden.11). moreover. by destination. since a much higher proportion of Asian TNCs’ assets are located in other Asian countries. Thailand. seven were based in developing Asia (and 14 in Japan). Asian parent firms and their foreign affiliates were caught by surprise when the dollar pegs of some Asian currencies proved unsustainable. Judging from changes in the ranking of Asian companies on the 1997 Financial Times “Global 500 list” of the largest companies in the world. China were not available by destination.Chapter VII however. that countries eager to attract FDI may provide foreign investors incentives that they would not grant under normal circumstances.18 in 1997. both intraregionally and elsewhere.2). The region’s TNCs have been financially weakened by the crisis for a number of reasons: • Valuation losses. 1995/1996 b • Source : a UNCTAD. 1996d). Republic of Korea. the stock of FDI located in other developing Asian economies was at least one-half of their total outward FDI (figure VII. With the worsening of the situation at the end of 1997 and the beginning of 1998. stock data for 1992 have been included. there were none and.

228 . 2 from Taiwan Province of China and 1 from Malaysia. averaging 18 per cent for the 15 companies from developing Asia included in the 1998 Fortune 500 list. Profit data for 1996 for developing Asia are not available.20 The effect is again to impair the ability of the affected firms to finance outward FDI. The impact of these factors is further compounded by high interest rates (and in some cases. compared to an increase of 25 per cent in the profits of European firms at the other end of the spectrum with respect to profits (figure VII. and the difficulty of raising funds abroad due to lowered credit ratings (table VII. The problems arising from devaluation in servicing dollar-denominated debt tend to be more pronounced for foreign affiliates oriented to local markets. their ability to self-finance their operations or to expand further. the increased cost of foreign operations due to depreciation of domestic currency. to raise funds (annex table A. Consumption has indeed declined in a number of Asian economies. As a result.2). TNCs from Asian developing countries seeking national or regional markets have less of an incentive to Profits gro world's larg Figure VII. Pr ofits gr o wth of w orld's lar g est 500 invest or reinvest in those countries. A shortage of cash has induced a number of Asian firms to divest assets abroad. 1996 and 1997 the other hand. Europe and the United States. forthcoming d). if their financial capabilities and ownership advantages this permitted.VII. at least as far as other parts of Asia are concerned: • To the extent that growth and demand in other Asian countries has declined (annex table A. by home region.VII.VII. reflecting in many cases a decline in growth rates or the onset of a recession (annex table A. 3 August 1998. 21 At the same time.12). Includes developing Asia and Japan. The largest Korean conglomerates.VII.12.Tr World Investment Report 1998: Trends and Determinants borrowing in foreign currencies has therefore aggravated the debt-servicing burden of TNCs with high debt-equity ratios. To the extent that parent firms and affiliates are located in countries that have experienced a decline in demand. the financial capacities of a number of Asian TNCs have been weakened.7) that were high by international standards (UNCTAD. since they do not earn foreign currency. had debt-equity ratios (annex table A. • Reduced profitability. a rise in non-performing debt as well as more demanding prudential regulations may further restrict the room for manoeuvre. TNCs headquartered in home countries whose currencies have been significantly devalued (table VII. The result has been a steep decline in profits in 1997. through reinvestment or in other ways. Includes data for 12 firms from the Republic of Korea.8). In particular. for example. In the case of banks.5). a general credit crunch) at home. the crisis has changed some of the parameters that induced some Asian firms to invest abroad in the past. especially in Asia. including their capacity to undertake outward FDI. market-seeking TNCs (Percentage) could switch to countries unaffected by the crisis.5).2) may find that devaluations have so far • Source : a b c based on For tune . may also have decreased. The calculations of efficiency-seeking TNCs depend very much on the devaluation-related movement of production costs at home as against in other Asian countries. On by firms.

Some of these measures may not be targeted at outward FDI but. scaled down or postponed their investment plans (figure VII. the expected declines in FDI from the Republic of Korea are considerably less pronounced. For example. investments which have significant linkages with domestic economy and earn foreign exchange will be continued”. Cr oss bor der M&A purc hases b y firms virtually every one of their major headquartered affected by headquar tered in the countries most aff ected b y the investment destinations (figure VII. based on KPMG Corporate Finance. as Asian TNCs’ capacities to sustain existing operations and initiate new FDI projects are weakened. Other measures are specifically FDI-related. policy measures adopted by governments to deal with the crisis could also discourage some outward FDI. First quarter data for the Republic of Korea and Malaysia suggest that this decline will continue. A survey conducted by the Export and Import Bank of the Republic of Korea in March 1998 corroborates these findings: 108 of 140 Korean TNCs responding had cancelled or postponed their FDI plans25 and the bank estimated that total outward FDI by Korean TNCs could fall by 60 per cent in 1998. Source : UNCTAD.9). 1997-1998 (Billions of dollars) and that reductions in FDI are likely to be particularly large in the four other crisis-stricken economies. In addition to the factors affecting the capacities and incentives of Asian TNCs to invest abroad.14). including a substantial decrease in crossborder M&As over the second half of 1997 (figure VII. the incentive for Asian TNCs to invest abroad and to invest in Asia in particular is weakened. so as to maintain liquidity.14). and from the five most affected countries in particular.15) crisis. Outside Asia. However. can be expected to remain at low levels in the short and perhaps the medium term.VII. at least in the short-to-medium term. they could also affect FDI. After the crisis reached that country.Chapter VII reduced the cost differentials between producing at home and producing abroad that it is no longer worthwhile for them to move labour-intensive production abroad in order to be competitive in world markets.23 Furthermore.13. 229 . the Government began to discourage outward (or “reverse”) investment by Malaysian firms. This was the case for both manufacturing and non-manufacturing firms . The year 1997 witnessed a decline of outward FDI from four of the five most affected countries (annex table A. FDI outflows from developing Asia in general. which amounted to 7 billion Malaysian ringgit during the first half of 1997. In either case. to the extent that they aim at minimizing outflows of capital in general. It was also the case for investment intentions for 1998-1999. suggesting that Korean firms expect to invest less in Cross border purc by Figure VII. The Government declared that “reverse” investment.13). the Government of Malaysia had encouraged its firms to invest abroad before the crisis (UNCTAD. (figure VII. 22 All in all. 1995a). according to a survey conducted by UNCTAD and the Federation of Korean Industries (FKI) in March 1998.24 some two-thirds of the 46 large TNC respondents based in the Republic of Korea indicated that they had either cancelled. “will have to be deferred even if these investments are to be financed through foreign borrowing.

especially in mediumtechnology industries.VII. it can be expected that outward FDI from the region (including the crisis-affected economies) will resume its upward trend.VII.Tr World Investment Report 1998: Trends and Determinants The picture looks different when headquartered Figure VII.10). even though there were a number of M&As by firms from other major developing countries in Asia in the five most affected economies during the first half of 1998 (annex table A.10). surve vey sur ve y responses a of Asia (China.14. This is also reflected in the fact that total M&A purchases outside Asia by firms from major outwardinvesting economies among the less affected Asian economies increased in 1997 over 1996 (annex table A. This includes the capacity to adapt technology to the needs of developing economies as well as advantages deriving from R&D activities. 1998. When it comes to the longer term. they can be expected to resume their position as leading developing-country Source : UNCTAD/FKI survey. uncertain. 1998. TNCs headquar tered in the Repub lic of Korea: belief of the corporate executives hanges investment for c hang es in investment intentions f or 1998-1999 in the light responding to the survey that of the crisis (Points) most of the fundamental determinants of Asian outward FDI can be expected to reassert themselves once the present difficulties have been overcome.15. One determinant is marketing and management know-how. Hong Kong. TNCs headquar tered in the the less affected major home economies Republic Korea: effects outward Repub lic of Korea: eff ects on outward FDI. This reflects the headquartered Republic Korea: Figure VII. especially in the newly industrializing economies. indicating that the combination of financial capabilities and economic incentives has remained favourable for them so far. Another is accumulated technological capacity. the painful lessons of the crisis and the restructuring in its light could strengthen the competitiveness of Asian TNCs. Whether this will continue in 1998 is a Percentage of respondents indicating each of the responses shown. Over the long term. Furthermore. (Percentage) Singapore and Taiwan Province of China) are considered: their performance regarding outward FDI improved slightly in 1997 over 1996 (see section A). 230 . Source : UNCTAD/FKI survey. China.

16 to VII. FDI/TNC database. this process took place between Japan (and the United States) on the one hand and the newly industrializing Asian countries on the other hand (UNCTAD. FDI in Viet Nam. Lao People’s Democratic Republic. These are mainly the countries of East and South-East Asia. Three factors are particularly relevant here: • The reduced capacity of TNCs in the region to invest abroad. cumulative flows. countr y of investment. may also be affected. 1995a). making them less attractive as destinations for market-seeking FDI.16. 1995a).Chapter VII investors. FDI in China. in the framework of the “flying-geese” pattern (UNCTAD. FDI/TNC database. The same considerations Figure VII.17. China. Other countries. data are for approved investment flows. Singapore and Taiwan Province of China. 1979-1997 a fall in FDI. brought about by the devaluations in the most affected countries. by Figure VII. the Asian least developed countries (Bangladesh. which makes them less attractive for efficiency-seeking FDI.13). a Source : Note: UNCTAD. b y region/ • • Developing countries in the region in which any or all country investment. Cambodia. To the extent that FDI flows into other developing countries in Asia do decline. Viet Nam. Data for developing Asia include data for Hong Kong. The reduced export competitiveness of the less affected countries. The possibility of reduced growth in the non-affected countries in the region.19). In the first instance. although they may well be more cautious and more focused in their internationalization in the future. be it for market-seeking or efficiency-seeking reasons. b y region/countr y of investment. including China. cum ulative flo ws. 231 . Japanese FDI may be affected (box VII. At a second stage. Myanmar) and Central Asia (figures VII. Implications for FDI flows into other countries The implications of the financial crisis for inward FDI are not confined to the five most seriously affected countries. especially in developing Asia. Republic of Korea.could fall. could also region/country investment. flows from developed countries to the less affected Asian developing countries. of these factors come into play are likely to experience cumulative flows. since interactive TNCassisted restructuring has been one of the dynamic forces that has assisted Asian development. In particular. Malaysia. in particular. 1993-1996 influence FDI Source : UNCTAD. 3. there could be broader implications. FDI flows into countries that receive significant amounts of investment from within the region -.especially from the most affected countries -. cum ulative flo ws.

Hong South Asia.5). including through intraregional FDI.Tr World Investment Report 1998: Trends and Determinants number of other Asian countries joined in. FDI originating in other developing Asian economies was at least 40 per cent higher than the share of Europe. Despite some increases in FDI from developing Asian economies. Republic of Korea. the share of the Asian developing countries in FDI in Japan. also receiving outward FDI from the newly industrializing economies. Malaysia. some TNCs may find sites in other regions more attractive relative to those in Asia for new investment projects in the short-to-medium term. region/country investment. 1993-1996 Source : Note: UNCTAD. could well increase (table VII. and between 0.in Africa. b y region/country investment. in the light of the crisis. and Central and Eastern Europe -.27 Similarly.6 per cent (Japan) of total stock in the first half of the by Figure VII. The ability of investors to substitute actual or potential FDI in one host region (or country) with FDI in another depends largely on the type of FDI as well as on the sector or industry concerned. region/countr y of investment. particularly from the Republic of Korea. FDI/TNC database.1 per cent (European Union) to 6. Survey results suggest that some firms are indeed looking at expansion in Latin America and also in Central and Eastern Europe and Africa in the short-to-medium term (table VII.21-23). China. the main sources of FDI to those regions are still Europe and the United States (figures VII. Indonesia. The current crisis could therefore lead to a slowing down or interruption of the process. such as recession in Japan and slowing down of growth in the United States -. basic FDI determinants are in good shape. Note: data are for approved investment. cumulative flows. cum ulative flo ws. if there is a global recession -. to the most affected countries may well gain in relative attractiveness. where FDI from other developing Asian Kong. Countries further away -. Taiwan Province of China economies has been relatively low (figure VII. the United States and the European Union amounted to between 1. FDI/TNC database. For the major developing host economies. 1996). provided that at least some of their Source : UNCTAD. FDI in Asian LDCs.are unlikely to be touched by the developments in Asia as far as FDI is concerned.26 and Thailand. Indonesia.20).18. Singapore. The following points among others are relevant: • Natural-resource-seeking FDI is largely location-specific and substitution is limited. countries in the region less closely linked. although. data are for approved investment. Indeed.and there are some signs of deflationary tendencies. Latin America and the Caribbean. Republic of Korea. cumulative flows. Ta i w a n Province of China and Thailand. by Figure VII. M a l ay s i a .6). cum ulative flo ws. Hong Kong.5). However. P h i l i p p i n e s.they could be. It might be expected that. b y 1990s (table VII. FDI in Central Asia. Data for developing Asia include data for China. 1992-1995 Furthermore. Japan or the United States taken singly (European Commission and UNCTAD.3 per cent (Japan) of total inflows. region/countr y of investment. this finding should not be interpreted as necessarily indicating an FDI switch to these regions in response to the crisis. if not in the longer term.5 per cent (European Union) and 4. 232 . Data for the UNCTAD/ICC survey suggested that FDI to developing Asia include data for China. China. S i n g a p o r e.19.

and they too have dollardenominated debt to service.Chapter VII Box VII. including the most affected countries.2 (4%) 2. Asia. Japanese TNCs held almost one-third of the inward FDI stock of the Republic of Korea in 1996.1 (1%) Japan 2. c affiliates Box figure I. a When it comes to the adverse effects of depressed demand on the profitability of foreign affiliates focusing on local markets. and Japan is in turn important for Asia. for example. The crisis has meant considerable difficulties for Japanese TNCs. 1995 (Billions of dollars and percentage) South.3 (2%) 5.13. 233 .7 (2%) Europe Europe Total sales: 78 Sales to the region: 72 (92%) • Domestic sales: 43 (55%) • Sales to third countries in the region: 29 (37%) 0.. MITI. b The future prospects of local market-oriented FDI in Asia from Japan depend critically on how fast East and South-East Asia overcomes the crisis. transport equipment. In comparison.. and many of the considerations discussed in relation to Asian developing-country TNCs are also relevant to Japanese TNCs.5 (4%) Nor th America Total sales: 157 Sales to the region: 145 (93%) • Domestic sales: 139 (89%) • Sales to third countries in the region: 6. In the transport industry. is an important host region for Japanese TNCs (European Commission and UNCTAD. East and South-East Asia in 1995 (box figure 1) and exports to the countries of the region accounted for another 15 per cent. Malaysia.4 (4%) 2. their stock has lost value because of devaluations by affected countries. It accounted for 60 per cent of the total sales of these affiliates in South. Like other Asian TNCs. and about one-quarter of it in the ASEAN 4 (Indonesia. The critical industries for Japanese foreign affiliates are chemicals.8 (1%) 5. in which the proportion of local sales is particularly high (Japan. 1998a. /. three-quarters of the Japanese affiliates incurred losses in 1997. 1998a.3 (2%) 1. and iron and steel.8 (4%) Source: Japan. Impact of the Asian financial crisis on Japanese FDI Japan has a particularly important role in FDI flows into Asia. the European Union held around 15 per cent and the United States 13 per cent of the inward stock of the ASEAN 4. Ministry of International Trade and Industry. Japan: destination of sales of Japanese affiliates abroad in manufacturing. 1996). East and South -East Asia Total sales: 130 Sales in the region: 98 (75%) • Domestic sales: 78 (60%) • Sales to third countries in the region: 20 (15%) 24 (18%) 3. table 2-21-6). it is relevant to note that local market-oriented FDI is fairly important for Japanese affiliates in Asia. the Philippines and Thailand) in the mid-1990s.

from Japan and elsewhere. and electric machinery. That would depend on how attractive other regions are. Devaluation-induced cost increases for imported inputs are probably above average for Japanese investors in textiles. The discrepancy between profitable investment opportunities in East and SouthEast Asia and Japan’s chances to compete successfully with bidders from Europe and the United States is probably most pronounced in banking and finance. but this does not necessarily mean a switch to other regions. Market-seeking FDI depends mainly on the size and income growth of host countries. an inadequate capital base and more demanding prudential regulations. FDI is not a zero-sum game and it need not be assumed that FDI for other regions must involve some withdrawal from Asia. 1998a. the competitiveness-enhancing effect stemming from devaluations is dampened by a fairly high dependence on imported inputs: in 1995. /. d On the other hand. Furthermore. Furthermore. However. Japanese banks are forced to reduce their engagement in this region because of mounting non-performing debts. who had to fight an uphill struggle against well-established competitors may now have a competitive advantage. either relatively or absolutely. an overwhelming majority (90 per cent) of the UNCTAD/ICC survey respondents who indicated that they expect to increase their investments in Latin America and the Caribbean and in Central and Eastern Europe did not intend to reduce their investments in East and South-East Asia in the short-to-medium term. Efficiency-seeking FDI may also be attracted by falling costs in Asia. continued) The effects of the crisis on export-oriented Japanese FDI in South-East Asia are less straightforward. Export-oriented Japanese FDI in the ASEAN 4 may also suffer from depressed demand conditions in Japan. 234 ..Tr World Investment Report 1998: Trends and Determinants • Asset-seeking FDI. table 2-226). new Japanese FDI may be attracted to developing Asia by the liberalization of FDI regulations in the countries affected by the current crisis. Outstanding in this respect in 1995 were fishery and forestry products (65 per cent). all of which had relied upon imported inputs in the range of two-thirds to four-fifths of total procurement in 1995. as discussed above. exchange-rate developments. Finally. The contraction of markets in the affected countries in Asia is thus likely to reduce some market-seeking FDI in the short-to-medium term. MITI. financial tension and liquidity constraints in the Japanese economy may put some Japanese investors at a competitive disadvantage in grasping the favourable FDI opportunities in developing Asia. imported inputs accounted for 62 per cent of the total procurements of all Japanese manufacturing affiliates in the ASEAN 4 (Japan. Prospects for Japanese FDI in South-East Asia thus depend on a variety of factors: economic recovery in Japan. precision machinery (44 per cent) and electric machinery (36 per cent) (Japan. They also depend on the extent to which such FDI is targeted at non-Asian markets in the future. 1998a. iron and steel. Their market access is facilitated by depressed local asset prices and their liquidity less constrained by the valuation losses ensuing from the devaluations of Asian currencies. may be attracted by the new opportunities in Asia.13. table 2-21-6). • • Thus the extent of a shift of FDI from the crisis-affected countries to other regions is likely to be limited. Indeed. and the potential to switch from production for the local market to production for exports and from foreign sourcing to local sourcing of inputs. nearly 50 per cent of them also indicated that they expect to increase their investments in (Box VII.. especially in industries in which Japanese foreign affiliates reported a high share of exports to Japan in overall sales. While the liberalization of financial services figures high on the reform agenda in East and South-East Asia. sales by export-oriented Japanese affiliates in the textile industry in Thailand increased in 1997 and 85 per cent of the firms are expected to make a profit in 1998. Latecomers to FDI in developing Asia. MITI. For example.

11. in the UNCTAD/ICC survey.5. firms see profitable investment opportunities across the spectrum of developing countries and do not necessarily see these countries as alternatives to one another. were somewhat lower. These shares.Chapter VII East and South-East Asia. Another survey undertaken in mid-1998 indicates that between 44 per cent (Indonesia) and 75 per cent (Philippines) of Japanese TNCs in the countries affected by the crisis expected to maintain or increase their FDI in t h e n e x t o n e . This is also confirmed by survey responses of foreign affiliates in Thailand. however. 1997c). Investment plans of Japanese TNCs in the next unchanged. only 1 per cent of which indicated an intention to shift investments to other countries (box VII. (Box VII. Hino Motors. Department of Commerce. United States affiliates in South. as well as automobile parts and component firms. Sharp. This survey was conducted by the Research Institute for International Investment and Development. see Tejima. 1998. e Furthermore. ibid. compared to of them even intended to increase the FDI level in 1997. South Asia 18 61 5 16 Latin America and the Caribbean 37 47 2 14 Central and Eastern Europe 27 52 2 18 Africa 11 62 3 24 Source : a Percentage of respondents indicating a particular response. p. Nihon Keizai Shimbum . in the mid-1998. concluded) All in all. c d e f Based on UNCTAD. able Shortinvestment world's Tab le VII. two-thirds of Japanese TNCs stated that their investment plans in the re g i o n re m a i n e d Box figure 2. 20 April 1998 and 5 May 1998. This view is supported by the increasing exports of Japanese affiliates in developing Asia. forthcoming.t h re e y e a r s . f Source : a b UNCTAD.13. In other words. by host region (Percentage) a Item Increase No change Reduce No answer East and South-East Asia 23 55 11 10 UNCTAD/ICC global survey.and medium-term investment intentions of the w orld's leading by TNCs in the light of the Asian crisis. Export-Import Bank of Japan. Shor t. Declines are expected to be most pronounced in Indonesia (56 per cent) and Thailand (53 per cent) (box figure 2). however. Nihon Keizai Shimbum .t o . 16 December 1997. 235 . 1998. than the corresponding shares for Japanese affiliates in Europe and North America. base. Japanese TNCs seem to be responsive to the changing environment in South-East Asia and some of them could turn the recent events to their advantage. and almost one-fifth affected 1-3 years in the most af fected Asian countries. Matsushita. Examples abound. East and South-East Asia have lower shares of domestic sales (53 per cent in 1994) than in Europe (65 per cent) (United States. 1998 (Percentage) their investments despite the crisis. Similarly. taken together.6). all plan to increase exports from their affiliates in Asia. FDI/TNC dataSource : Tejima.

The extent to which the financial crisis spills over into the real sector and the way it is handled will determine how it affects the size and nature of TNCs’ operations in the region. with or without a crisis. FDI/TNC database. Indonesia. source region/country b y sour ce region/countr y of investment. FDI in Africa. There is a growing consensus that economic growth will slow in 1998 and perhaps also in 1999. by Figure VII. FDI in Latin America and by source region/country the Caribbean. 1993-1996 4. the relative FDI position Asia attained during the past decade is being readjusted as Latin America and the Caribbean emerge from their “lost decade” and Central and Eastern Europe open their economies. Ta i w a n further increases. 236 . cum ulated flo ws. but there is far less agreement over how much it will fall and how quickly the affected economies will recover Source : UNCTAD. by source Figure VII. Province of China and Thailand. of investment. FDI/TNC database and national sources. M a l ay s i a . China.7). 1993-1996 Source : UNCTAD. cumulative flows. cum ulated flo ws. cum ulated flo ws. investment. it needs to be recognized that. cumulated flows. Thus a shift would occur even without any interregional diversion of FDI flows on account of the crisis. Source : UNCTAD. by sour ce region/country investment. As regards Africa. Central and Eastern Eur ope . the characteristics of the host countries in that region and in Asia are so different from those of Asian host countries that there is little direct competition between the two regions (chapter VI).23. Republic of much potential for Ko r e a . Hong Kong. Data region which offers for developing Asia include data for China. Central and Eastern Europe. F D I / T N C d a t a b a s e a n d national sources. in any event. cum ulative flo ws.20. FDI in South Asia b y region/country investment. S i n g a p o r e . Figure VII.22. In other words. cumulated flows. 1993-1996 Figure VII. is a Note: data are for approved investment. Source : U N C TA D. region/countr y of investment. Conclusions It is difficult to assess the overall impact of the different factors here discussed on FDI inflows in the short and medium term into the countries most affected by the crisis (table VII.21. b y source region/countr y investment.Tr World Investment Report 1998: Trends and Determinants Indeed. FDI flows to Latin America and the Caribbean and to Central and Eastern Europe already showed a subst a n t i a l u p w a rd trend before the Asian crisis (chapters VIII and IX). region/countr y of investment. FDI/TNC database and national sources. cumulated flows. as other regions improved their FDI appeal. Europe ope. Asia’s share in the total FDI going to all developing countries would decline in any case. 1993-1996 Finally.

The rationale for taking the second view would be that the economic fundamentals of the region remain sound and attractive for FDI. substantial infrastructure capacity and access to regional markets. that would contribute to counteracting.6 1. 1997d.6. have become even more so. access resources and improve efficiency. These include high domestic savings rates. even if modestly.3 d proper.and medium-term effects (box VII. specifically for efficiency-seeking and asset-seeking FDI in the form of devaluation-driven cost advantages and cheaper and more easily available assets. they would position themselves in the region strategically. skilled and flexible human resources.4 c 0. promotional efforts could be considered. In brief. of course. b 1993. able developing Tab le VII. accelerated. like domestic investment.to medium-term to the region as a whole. since the competitive strengths of firms headquartered in the region remain unchanged and 237 . by strengthening their portfolio of locational assets to service markets. c 1990-1994. 1997b. If flows are maintained or increased. especially as far as market-seeking FDI is concerned. including the five most affected countries. the size of host country markets is bound to contract in countries affected by the crisis and thus discourage some market-oriented investments in the short term. 1998).Chapter VII (International Monetary Fund. the expected fall in income and employment and would help in the process of recovery. The extent to which the three sets of FDI determinants mentioned above translate into actual FDI inflows depends upon the longer-term views TNCs take of the future of the region. East and South-East Asia. Second. The crisis also creates opportunities for FDI. and cautious in acquiring assets in the region. Much will depend upon how quickly the efforts to stabilize the financial markets and external financing positions of the crisis-affected economies are broadly successful. which were already Source: UNCTAD. they will be reluctant to invest. They might even consider divesting. even from the most affected countries.6 g regulatory frameworks. China. business facilitation has been strengthened d 1994. many of them remain attractive. 1990s (Percentage) Flows 1983-1990 1990-1995 0. is pro-cyclical. There will.14). First.3 6. the United States and European the Eur opean Union. Further policy measures and g 1990 stock from Hong Kong. China plus 1991-1995 flows from South. and promotional efforts have been e On approval/notification basis. 1998a). as regards the economic determinants of investment.1 0. be variations among countries depending on the speed and thoroughness with which they master the crisis and restore macroeconomic stability. FDI. they would see the crisis as an opportunity for competitiveness-enhancing FDI.5 b Economy European Union When it comes to FDI determinants United States 0. If they take a negative view. If they take a positive view. declining during recessions and rising as recovery gathers speed. UNCTAD. although FDI stock does not fall as a rule and foreign affiliate output and employment show less cyclical variation than FDI flows (Ramstetter. Third. quite open and hospitable to FDI prior to the a 1990-1993.3 4. crisis. The combination of these factors should allow for cautious optimism about FDI flows in the short. f Only Hong Kong.0 4. The share of Asian de veloping countries in FDI in Japan.1 a Stock 1985 1995 0. especially to deal with the short. The same determinants are crucial for the long-term prospects for FDI flows to Asian countries. Japan e f f 3.7 2. This includes flows from Asian TNCs.9 1.

7. due to exit of some domestic or other firms adversely affected by capital/ liquidity constraints (+) Reduces availability of and increases costs for foreign firms to raise funds in host-country markets. Similar findings emerge from surveys of foreign affiliates in Thailand (box VII. and (especially) crossborder M&As (+) Reduces financial capacities of some foreign affiliates. Even if these positive expectations may have become more cautious since the surveys were conducted in the first half of 1998.Lower costs and prices. . The great majority (over four-fifths) of the respondents reported that their confidence in the region as an investment destination had remained unchanged (figure VII. The pattern of the findings in this regard is similar across firms in different sectors (figure VII.interest-rate increases. Depreciation of foreign currency value of assets in existing affiliates. some controls on capital flows Discourages outward FDI (-) Source: UNCTAD. .tightened monetary policy. the Republic of Korea28 and Malaysia’s electrical and electronics industries (box VII. they reflect the fact that Asia remains an attractive region despite the crisis. Reduced rate of GDP growth. Implications for inward FDI Encourages all kinds of FDI with locally-sourced assets/inputs for establishment/expansion (+) Encourages export-oriented FDI and efficiency-seeking FDI (+) Implications for outward FDI Discourages outward FDI due to: .24).lower supply of foreign capital by banks and portfolio investors. encouraging greenfield. in terms of currencies of home and third countries with stable exchange rates. Note: ‘+’ and ‘-’ signs indicate possible increase or decrease in FDI. . . leading to reduction of or slower expansion of demand/market size Drastic decline of asset prices. 238 . the majority of the respondents expressed their confidence in the long-term prospects of those economies as profitable destinations for FDI. able Summary effects possible for short Tab le VII.9). In each case. Expectations of a continued growth of FDI flows to Asia in the long run are supported by the findings of the UNCTAD/ICC Survey (box VII. especially by larger firms.26).25) and from different home regions (figure VII.Lower home-currency costs of establishing or expanding affiliates for TNCs from countries with stable exchange rates.6).8).Higher costs in home country currency to support existing foreign operations (-) Discourages domestic or regional market oriented FDI (-) Could discourage some intraregional outward FDI (-) Exchange rate GDP (market size) Asset prices Lower costs for entry.Higher costs in home country currency to finance new investments (-) . Creates opportunities for FDI generally. Summar y of eff ects of the crisis and possib le implications for FDI in the shor t and from affected by medium term in and from countries aff ected b y the crisis Host-country variable affected Changes related to/ resulting from the crisis Large depreciation of currencies leading to: . with adverse effects on reinvestment (-) Supply of capital/finance Lower supply due to: .Tr World Investment Report 1998: Trends and Determinants they can be expected to resume their outward FDI once financial strength is restored.heavy debt burden. affecting FDI by some (especially smaller) firms adversely (-) Increases opportunities for FDI through M&As by foreign firms (+) Discourages outward FDI due to difficulties in financing new investments and difficulties in financing existing operations (-) FDI policy changes Further liberalization of inward Creates opportunities for new FDI (+) FDI policy.

1993a). Vietnam. Home countries whose tax policies allow the use of optional reserves and grant tax deductions for the depreciated value of their firms’ foreign affiliates could consider recognizing the present circumstances in Asian countries as meeting the criteria for such reserves and deductions.to provide information about greenfield and joint venture investment opportunities.14. Countries might pay greater attention to providing assistance to dynamic and innovative smalland medium-sized enterprises which are also transnationalizing and the role of which as potential partners in international networks and technology alliances would thus be enhanced. much more will depend on the quality of those more general policies. While specific efforts aimed at maintaining and increasing FDI flows can make a contribution to the process of overcoming the impact of the crisis.that have depended heavily on outward investments from some of the crisis-stricken countries. steep and debilitating devaluations of foreign currencies. joint venture operations and the transfer of appropriate technologies (UNCTAD. a number of them -. such efforts would have to be embedded in more general policies aimed at restoring macroeconomic stability and economic performance.China. the use of local subcontracting. Effects on FDI to South Asian countries as well as to Asian newly industrializing economies are likely to be modest.Asian countries could formulate joint measures to encourage FDI and its contributions to the economies of member countries.Chapter VII As regards the implications of the crisis for Asian countries not directly caught up in the crisis. 239 . This would be akin to investment incentives for new inward FDI projects. Policy measures Since continued FDI flows could make a useful contribution to restoring economic growth and maintaining export levels in Asian countries affected by the crisis. They often face obstacles related to their size and governments need to address these if they wish to attract small. Attractive opportunities could also be highlighted in component or other supplier sectors that are often less visible to foreign investors than final-goods manufactures. as well as competed with them for export-oriented FDI. Home country political-risk-insurance programmes for investors could consider expanding their coverage of foreign affiliates to sudden. Care would need to be taken in formulating these measures to avoid introducing undue discrimination against other investors. Some specific measures that might be considered in this context include the following: • Governments of the affected countries could make an extra effort . These enterprises are even more likely than large TNCs to generate early beneficial effects. • • • • • • Naturally. especially in activities they consider as priority areas. 1998g) as investors. such as those in which costs are denominated in local currencies while revenues are obtained in hard currencies. such as improvements in the trade balance.perhaps helped by regional and international institutions .and medium-term enterprises (UNCTAD. Asian TNCs could consider adopting international accounting standards as soon as possible. Where appropriate. are likely to receive lower FDI inflows in the short-to-medium term. Countries that are hosts to foreign affiliates of Asia-based TNCs in financial distress could consider temporary measures of assistance to help sustain existing affiliates. where this is warranted.such as the ASEAN Investment Area -. the Asian LDCs and the countries of Central Asia -. Within the framework of regional integration arrangements and other fora for international cooperation -. Indeed. they might become Box VII. as well as strengthening institutional capacities to advance the process of development. Special attention might be given to industries whose prospects remain (or have become) particularly attractive. but adapted to the special present circumstances in the post-investment stage. policy measures to encourage them deserve attention.

Latin America and the Caribbean. Asian countries face increasing competition for FDI. prospects: Figure VII. Long-term pr ospects: company by compan y intentions by sector prospects: company Figure VII.26. 240 . Long-term prospects: o verall world orldwide response of companies w orld wide Finally. This suggests that. March 1998. since Asian firms have not yet made significant inroads as investors in countries outside the region. because of favourable economic performance and other changes conducive to FDI. and Central and Eastern Europe had already showed an upward trend independently of the Asian crisis. FDI flows to Africa. March 1998. The likelihood of diversion of non-Asian investors from Asia and. affect other regions substantially. In any event. Source : UNCTAD/ICC global survey. the extraregional impact of the crisis will probably be modest. The changing parameters for outward FDI by Asian TNCs are unlikely to Source : UNCTAD/ICC global survey. although the possibility of adverse indirect effects cannot be ruled out if a global economic slowdown were to occur. especially from the most affected Asian countries to other regions are also quite limited.Tr World Investment Report 1998: Trends and Determinants more attractive to foreign investors looking for new locations for investment in the light of reduced scope for expanding FDI in the most affected countries.25. prospects: overall Figure VII. March 1998. Long-term prospects: compan y by company intentions by home region of parent compan y Source : UNCTAD/ICC global survey. while there may be no diversion of FDI to those regions because of the crisis.24.

). 27 July 1998. Inflation in South-East Asia is estimated to be 13 per cent in 1998. in European Commission and ASEM. For example.F. 1998 Star Publications (M) Bhd (No. (“Measures to strengthen ringgit”. International Herald Tribune. “Financial Times Global 500". 21 January 1998. 14 January 1998.flo. "GM decides not to bid for Kia. London. Financial Times.. The value of M&A sales in the five most affected countries to cross-border purchasers was $6.d. “Big three auto makers go shopping for deals in Asia”. (“Asian firms beat retreat from U. Financial Times. Financial Times. and Mangistaumunaigaz in Kazakhstan. According to preliminary data obtained from the Bank of Korea. a part of changing corporate strategies. However.8 billion in the second half of 1997 and $5. It is only since the outbreak of the financial crisis that Asian TNCs appear to have adopted strategies to avoid currency risk. 6 June 1997. 27-28 September 1997. 15. III.2. (Data provided by KPMG Corporate Finance). as a part of its plan to strengthen the ringgit. leaving race to Ford". Based on data from United States. “to reduce or suspend reverse investment temporarily with the assurance that overseas investment would be allowed when conditions improve”. 3-4 April 1998 (Internet: http:// asema.7 and III. Mexico City. of the Republic of Korea is reported to have sold its affiliate Symbios (acquired from AT&T Corp. a Silicon valley company. which proposed.F.5 billion in the first half of 1997.uk/asema/texts/closing/chairmans. It is therefore not always easy to determine the reason for a particular divestment. $5. 10894-D).my/archives/neac). International Herald Tribune. mimeo.F. compared with 6 per cent in 1997 (ADB. 3 April 1998.. 1998.”. “Financial Times Global 500”. “Fall out from Asian Turmoil starts to affect multinationals”.S. Foreign affiliates of developed and other country firms in the crisis-stricken countries that have also borrowed heavily face less of a problem since their home country currencies have maintained their value vis-à-vis the dollar. International Herald Tribune.I). “The Asia-Europe Investment Promotion Action Plan”. 1998 (n.Chapter VII Notes 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 “Kazakstan sells 60% of largest oil firm”. Financial Times. especially at unfavourable exchange rates. “Mazda closes Thai plant”.8. Japan. based in Indonesia. Asia-Europe Summit Meeting. at a price of $775 million. International Herald Tribune. outward FDI from the Republic of Korea during the first quarter of 1998 decreased by 51 per cent as compared to outward FDI over the same 241 . p. In the specific circumstances mentioned. 1997 (n.goVII.5 billion in the first half of 1998. Levels of FDI flows into the most affected countries which are similar to past levels in dollar terms would therefore signal increased interest by TNCs in Asia. “ASEM 2 Statement: The Financial and Economic Situation in Asia”. p. As discussed in chapter V (box V. for $300 million in 1994) in the United States to Adaptec Inc. 22-23 August 1998. (Retrieved on 28 July 1998 from http://the star. divestment is a normal occurrence. 13 May 1997. London. Chairperson’s statement at the Second Asia-Europe Meeting. This proposal was recently reiterated by the National Economic Advisory Council of Malaysia. The deal was made during the first half of 1997 between the SETDCO Group. tables III.) Ibrahim (1997). the extent of the improvement will depend on how far export-oriented foreign affiliates rely upon imported inputs. Hyundai Electronics Industries Co. a price considered low by analysts. Mexico. Department of Commerce. 1997a.). It is also difficult to ascertain to what extent some of these are distress sales. Based on data obtained from SECOFI. 4 March 1998. p.statement/). a firm may judge it preferable to sell foreign assets than to sell domestic ones. Terms of Reference for the ASEM Investment Experts Group. Economic Ministers’ Meeting.d. Based on UNCTAD’s FDI/TNC database and data provided by the World Bank. and “China buys oil firm in Kazakstan: $4 billion deal aims to bolster supplies”.com. Financial Times. 10). Makuhari. 17.

For example. 4193. As for Malaysia. 1998. outward FDI declined from RM1. 242 . The survey on the implications of the financial crisis for outward FDI was conducted by the UNCTAD secretariat and the Federation of Korean Industries in March 1998 and covered the 100 largest TNCs headquartered in the Republic of Korea. That growth momentum may have suffered because of the financial crisis. Firms from the Republic of Korea had planned to invest $4 billion in India between 1997 and 1999 (UNCTAD. figures subject to revision). Intraregional FDI in South Asia.9 billion in the first quarter of 1997 to RM1. the pace of investment from the Republic of Korea in India started outstripping that of India’s traditionally important trade and investment partners. No. A total of 46 firms responded to the survey questionnaires. in 1996.1 billion in the first quarter of 1998 (Malaysia. the Republic of Korea accounts for 11 per cent of the FDI stock in Romania and 6 per cent of that in Poland. 1988. Based on the results of the UNCTAD/FKI survey. However.Tr World Investment Report 1998: Trends and Determinants 24 25 26 27 28 period in 1997. Bank Negara. Cited in SUNS: South-North Development Monitor. 16 April 1998. gained momentum during the mid-1990s. 1997d). some of which were followed up with interviews. particularly from the Republic of Korea.

FDI stock as a percentage of gross domestic product was even higher for Latin America 243 . In 1997 Latin America and the Caribbean attracted a record $56 billion in FDI inflows. In terms of their role in host economies.3).1). East and South-East Asia. Even Mexico’s 1994-1995 peso crisis did not discourage foreign direct investors. Aruba. however. Indeed. with ratios for the largest countries ranging from around 7 per cent to over 40 per cent (annex table B. this trend was reversed. the countries that experienced the largest percentage increases were Venezuela. among the smaller ones. FDI flows to the region accounted for 38 per cent of total flows into all developing countries in 1997 and the increase in inflows accounted for two-thirds of the overall increase in flows into all developing countries.Chapter VIII CHAPTER VIII LATIN LATIN AMERICA AND THE CARIBBEAN Trends A. This was largely a consequence of poor economic performance.2). as Latin America began to receive substantial and growing FDI inflows. Trends Inward foreign direct investment (FDI) in Latin America and the Caribbean was comparatively low between the early 1970s and the early 1990s. and 5 per cent for the world as a whole. FDI flows into the region grew more than twice as fast as flows to all other developing countries as a whole.1). Thirty countries received more FDI inflows in 1997 than in 1996 (annex table B. Saint Lucia and Suriname (figure VIII. including thirteen of the top twenty recipients (figure VIII.5 and figure VIII. Among the larger recipients. From 1991 onwards. Saint Vincent and the Grenadines. mainly resulting from the debt crisis in the region. Mexico and Brazil and. and even declined during a part of the “lost decade” of the 1980s. FDI inflows reached 11 per cent of gross fixed capital formation in the region during 1994-1996. This compares to ratios of 8 per cent for South. during 1995-1997.1 This represented an increase of 28 per cent over 1996.

Flows of FDI into Central America not including Mexico amounted to $1. Latin America and the Caribbean: FDI flows flows into the top 20 recipient economies in 1997 and flows to the same economies in 1996a In absolute terms.3). started work on a $500 million regional production and testing system and other high-tech companies are following suit.Tr World Investment Report 1998: Trends and Determinants and the Caribbean as a whole. as measured in relation to either gross fixed capital formation or Source : GDP (figures VIII.5).3 and VIII. Brazil and Mexico accounting for 62 per cent of total flows to the region.4). The largest recipient among the financial centres was Bermuda. the absolute level of FDI flows received was low. In 1997. Peru. The rising star was Brazil. inward FDI flows relative to gross fixed capital formation were much higher for many smaller countries than for the larger ones (figure VIII. by far the largest recipients of inward FDI flows in 1997 (figure VIII.1). Ratios for the largest economies of the region ranged from around 8 per cent to 29 per cent.6 and figure VIII. 244 . attracting more than $16 billion in FDI and increasing its lead over Mexico. This compares with 16 per cent for South. and ratios for some smaller Caribbean nations exceeded 100 per cent (annex table B. not surprisingly.2 billion in 1997. up from $900 million in 1996. INTEL. Among Central American countries. the larger economies of the region were. which continued to be the largest in the region even during these years. accounting for over half the flows into the entire subregion in 1990-1997 (figure VIII. Among the remaining countries. Venezuela. receiving FDI inflows well below what might have been expected given the size of its economy and its total FDI stock. Flows into Caribbean countries. Costa Rica was particularly successful in attracting FDI into more sophisticated activities. significant shifts in attractiveness occurred among the larger recipient countries. which had held this position for the preceding six years (box VIII. Brazil regained its position as the region’s champion by overtaking Mexico. although significant relative to their size in most cases. a major United States chip maker. East and South-East Asia and 11 per cent for the world as a whole. Brazil consolidated its position in 1997. U N C TA D FDI/TNC Within this context of overall growth.1). Indeed. In 1996.4).2 billion during 1994-1997. the second largest recipient. with Argentina. During the first half of the 1990s. reaching 17 per cent in 1996. database. flows Figure VIII. Colombia and Chile accounted for a further 26 per cent. Brazil had fallen behind the rest of the region. increased from an annual average of $800 million in the 1990-1993 period to $1.1. excluding offshore financial centres.

mainly from the Republic of Korea and Taiwan Province of China. Key destination industries for United States FDI in the region are automobiles. Intraregional investment has also grown noticeably (UNCTAD. mainly in Mexico. came primarily from Germany. top 20 economies. with outward FDI of $24 billion in 1997 and cumulative flows of $121 billion during 19901997. Investment flows from Japan were comparatively low but have been growing recently. FDI inflows from developing Asian economies. electronics and other manufacturing. increased considerably. Flows from Europe. 245 . 1996-1997 Source : a b UNCTAD. European FDI is concentrated most strongly in services and manufacturing in the larger MERCOSUR countries: Argentina and Brazil. which have been growing steadily since 1994. Latin America and the Caribbean: growth of FDI. Ranked on the basis of the magnitude of FDI inward stock growth rates. 1997a. France.Chapter VIII The United States remains the largest investor in Latin America and the Caribbean. (MERCOSUR also includes Paraguay and gro Figure VIII. and apparel in the Caribbean Basin. Spain and the United Kingdom. FDI/TNC database.2. mostly in apparel to supply the United States market. 1998). Ranked on the basis of the magnitude of FDI inflows growth rates. Garay and Vera.

Macroeconomic fundamentals. 246 . 1997/1998). The average rate of inflation dropped from 200 per cent in 1990 to 11 per cent in 1997. top 20 economies. 1998a.Tr World Investment Report 1998: Trends and Determinants Uruguay. macroeconomic conditions seemed most promising and integration through NAFTA was consolidating. p. with Bolivia and Chile as associated members. in particular. and in oil extraction (table VIII. before the peso crisis. changing macroeconomic conditions. (annual avera verag 1994-1996 (annual average)a Source : a UNCTAD. the unequal timing of reforms (particularly privatizations) and differences in regional integration processes all seem to be important factors.8 per cent in the current decade. the pace of reforms increased and the prospects of integration in the MERCOSUR area consolidated in the past few years. The average annual rate of GDP growth rose from 1 per cent in the 1980s to 3. appears to have been strongly influenced by the timing of the privatization process and integration in MERCOSUR. wide-ranging privatization programmes. The pace of flows into Argentina. when. was the main recipient of inflows to the region in the first half of the decade. 1997). percenta centag as a percentage of gross fixed capital formation. mainly in automobiles. It is indeed no coincidence that the relative importance of Brazil as a recipient of inflows has increased as macroeconomic fundamentals have improved.1) Several factors help to explain both the restored attractiveness for FDI of the region as a whole and the changes in the distribution of FDI flows among the region’s economies. These include macroeconomic stabilization. Mexico. Ranked on the basis of the magnitude of FDI inflows as a percentage of gross fixed capital formation.3.5 per cent in the 1990s. with per capita growth rates rising from -1. trade liberalization. FDI/TNC database. Latin America and the Caribbean: FDI flows gross fixed formation. flows Figure VIII. with inflows growing faster since 1993. deregulation of policies regarding private investment (both domestic and foreign) and advances in regional integration (CEPAL.0 per cent to 1. The largest foreign firms in the region are mostly affiliates of United States and European firms in manufacturing industries.) In terms of size. have improved considerably in recent years (CEPAL. and the export index of the region (1990=100) has more than doubled since 1990. on the other hand. surpassing the 200 mark in 1997. 4). 33 of the largest 100 companies in the region (ranked by sales) are foreign affiliates (América Economía. on the other hand. With regard to the distribution of inflows among countries.

Indeed. Ranked on the basis of the magnitude of FDI inward stock as a percentage of gross domestic product. has not played a major role thus far.7). the home country and the economic sector in which the investment is made: • In MERCOSUR the main driving force of FDI appears to be market expansion. The principal concern was that privatization-related acquisitions of state assets by foreign investors. concerns about the sustainability of FDI flows into Latin America have proved unfounded (Nunnenkamp. during 1994-1996 major new investments were made in new assets or in the modernization of privatized companies and of existing foreign affiliates (figure VIII. including the pursuits of efficiency. The motivations behind individual investment projects vary according to the recipient country. top 20 economies. 1996a strategic assets. on the other hand. surpassing the corresponding value for Asia (see annex table B. Instead. transnational corporations (TNCs) have shown great flexibility in adapting to shifting opportunities in the region.2). particularly in the automobile and chemical industries. As a result. This trend appears to be most pronounced in manufacturing.6). FDI/TNC database. in an increasing number of cases through mergers and acquisitions (M&As). In 1997. as privatization-related opportunities in some countries have declined. Corporate investment strategies in Latin America and the Caribbean have been driven by a variety of different strategic motives on the part of TNCs. have invested strongly in the MERCOSUR area to defend and increase their shares in these markets. particularly during the 1990-1993 period. 247 . which are expanding rapidly on account of economic Source : a UNCTAD.4. Latin America and the Caribbean: FDI stock as a (table VIII. M&As by foreign firms in the region represented 13 per cent of the world total. the United States and Asia. 1997b). would have only a one-off effect on inflows. M&As have gained increasing prominence.Chapter VIII Independently of the factors that help to explain changes in the regional composition of FDI inflows in the past few years. percenta centag gross percentage of gross domestic product. firms from Europe. in which certain industries have attracted substantial FDI. The pursuit of product. often in the form of new greenfield investments. In the context of increasing global competition among TNCs. markets and resources stock Figure VIII.

steel (13 per cent) and mining (8 per cent). Privatizations. accounted for almost 27 per cent of FDI flows over the past two years (Brazil.. followed by the electronics industry (19 per cent). in association with local investors. Bell South (United States) has been the most prominent. automobile components and steel.3 billion in 1997. This was mostly the result of macroeconomic stabilization (especially the successful implementation of the Plan Real). 61 per cent of the buyers were foreign firms (mainly from North America) and 59 per cent of the transactions involved firms in the manufacturing sector.1. although foreign affiliates already established in Brazil account for the bulk of recent investment. 1998). until now only around 30 per cent of the privatized assets have been acquired by foreign investors (BNDES. 1996). a number of these firms have been sold to TNCs or have formed alliances with TNCs looking for cost-efficient ways of accessing the expanding and profitable local market (FIPE. 1998). particularly in the automobile industry. chemicals. Among these are: the growth of greenfield FDI and cross-border M&A. however. Within the service sector. Thus. In these operations. /. is the increase in the share of services in total inflows. chemicals and pharmaceuticals (9 per cent) and food and beverages (6 per cent). followed by Spain (16 per cent of the revenues). Another interesting feature of Brazil’s recent FDI flows is its sectoral pattern. during 1990-1993. Indeed. the growth of FDI aimed at penetrating Brazil’s domestic and regional market (MERCOSUR) in protected industries like automobiles. the Brazilian federal and state authorities collected $43 billion in privatization revenues excluding the transfer of entreprise debts. This surge in M&As is partly the result of the fact that domestic industries. 1998a). have had outdated capital stock and limited access to international financial services and have therefore been unprepared to compete on a global basis. the involvement of foreign firms has been somewhat higher (38 per cent and 40 per cent. 1997). from 1991 onwards. respectively). metallurgy (13 per cent). and the rationalization. the attractiveness of a large market. Banco Central do Brazil. Most of the foreign investors participating in privatizations originate in the United States. aimed strategically at acquiring or improving shares in the growing markets of Brazil and MERCOSUR. which has been significantly different from that of earlier years. only a small part of FDI was directed into manufacturing and that was aimed principally at the rationalization of existing enterprises (Bielchowsky and Stumpo. the participation of foreign investors in the widespread privatization of state-owned firms. Indeed. telecommunications and information services were the prime recipients. Recent FDI flows have gone to a variety of industries. Most of the revenues came from the sale of enterprises in the electronics industry (42 per cent). petrochemicals and fertilizer plants to private hands. Thus. mining. having paid. there was an increase in FDI in the manufacturing sector aimed at serving local and regional markets. steel. Chile (8 per cent). $3 billion for the right of operation of cellular telephones in two of the ten zones of Brazil. as growth accelerated and the economy stabilized. according to a recent study (Laplane and Sarti.3 billion in 1993 to $16. followed by the modernization of existing facilities (23 per cent). particularly in the case of paper. Between January 1991 and April 1998. which accounted for one-third of all M&As in this period. In state-level sales. 248 .. mainly in electronics and telecommunications (cellular telephones). On the other hand. However. was completed with a minority participation by foreign investors. Some 600 M&As took place between January 1992 and 1997. reorganization and restructuring of established foreign affiliates. Most FDI has been used to establish new production facilities (58 per cent). involving the transfer of aircraft. The most targeted industries were food and beverages (14 per cent). there is also a considerable number of newcomers. more than half of it in 1997 alone. FDI by newcomers has been mostly concentrated in automobiles (51 per cent). The most salient change in the sectoral composition of FDI. electrical machinery (12 per cent) and pharmaceuticals (8 per cent). the opening up of the economy and the privatization programme.Tr World Investment Report 1998: Trends and Determinants Box VIII. The first phase of the privatization programme. through different mechanisms. Sweden (5 per cent) and France (4 per cent). cellular telephone networks (19 per cent). finance and insurance. mainly as a result of privatizations in that sector. Brazil: the new champion FDI flows into Brazil increased from $1.

Volkswagen (Germany) plans to build another factory in Parana to export vehicles to its affiliates in Mexico. (Box VIII. 1998). This would increase its Brazilian investment to $3. an amount equivalent to twice the total inflows in 1994. concluded) Perspectives in the automobile industry continue to be promising as. and expects to invest $1 billion by the year 2000. General Motors (United States) has announced its intention to invest $3. The company now has two assembly plants in Brazil. Indeed. Brazil’s industry has become a favourite destination for the world’s leading automobile companies: * Daimler-Benz (Germany) moved its assembly operation of 2. with sales of more than 2 million units per year. Latin America: the 20 biggest foreign affiliates. the impact of the Asian crisis on FDI flows into Brazil has been limited. Banco Central do Brasil.Chapter VIII able bigg foreign by Table VIII. preliminary figures indicate that. * * * * It is not only flows into the automobile industry that are expected to grow. the prospects for future inflows continue to be bright across most industries. This is mostly explained by the fact that FDI represents a long-term commitment to Brazil’s economy and is associated to an important extent with the dynamics of the privatization process.000 units per year.2 billion (Brazil. By the same year.1. 1998b).5 billion (Bustos. Source: UNCTAD. Fiat (Italy) announced plans to invest $1 billion by the year 2000 to produce a new model (Palio) to be exported from its plant in Betim to other developing countries. 249 . Given the evolution of the economy and advances in the process of reforms (particularly privatization). 1996 Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 TNC Volkswagen Chrysler General Motors General Motors FIAT Shell Carrefour Ford Ford Nestlé Telefónica Gessy Lever Texaco Pepsi Exxon Mercedes Benz IBM Telecom Shell Nissan Home country Germany United States United States United States Italy United Kingdom/Netherlands France United States United States Switzerland Spain United Kingdom/Netherlands United States United States United States Germany United States France United Kingdom/Netherlands Japan Industry Automotive Automotive Automotive Automotive Automotive Petroleum Commerce Automotive Automotive Food products Telecommunications Chemical products Petroleum Food products Petroleum Automotive Machinery and equipment Telecommunications Petroleum Automotive Host country Brazil Mexico Mexico Brazil Brazil Brazil Brazil Mexico Brazil Brazil Argentina Brazil Brazil Mexico Brazil Brazil Brazil Argentina Argentina Mexico Sales (Millions of dollars) 7 000 6 455 6 346 5 433 4 743 4717 4 510 3 879 3 830 3 592 2 751 2 749 2 639 2 600 2 470 2 131 1 950 1 930 1 866 1 800 Source : ECLAC.6 billion.1. in the first four months of 1998. FDI inflows have exceeded $4. together producing 40.000 trucks and buses from Argentina to Brazil. Unit on Investment and Corporate Strategies. Ford (United States) plans to invest $1 billion in the year 2000 to produce two new models . As to the external environment. by sales.

With its fiscal consolidation programme of November 1997. the pace of Brazil’s privatization a Includes Argentina. Peru. 1990-1997 Source : UNCTAD. both market-seeking and resource-seeking appear to be the major motivations of TNCs from all regions. The lead in this respect has been taken by United States TNCs attempting to obtain a competitive edge in their home market vis-à-vis other firms. overwhelmingly to the United States market. This is the case. much will depend on Source : UNCTAD. the case of Brazil is again Figure VIII. In these sectors. labour and natural resources. 1998). which had been off-limits to foreign capital in previous decades. In the services and primary sectors. telecommunications. financial services. Chile. in selected countries of Latin America. manufacturing FDI has mostly been efficiency-seeking and motivated by efforts to improve exports. Mexico.6. government policy has played a crucial role in generating the conditions under which the current boom in FDI has occured. the Paraguay. Asian and European TNCs have also followed this trend. Bolivia.Tr World Investment Report 1998: Trends and Determinants growth and advances in the process of regional integration. The Caribbean: FDI inflows by major host economies. in energy. Latin America and the Caribbean: FDI inflows by mode inflows by illustrative.5. power generation. for example. FDI/TNC database. FDI/TNC database. • Apart from the region’s attractivess because of its markets. this has also been the case in such services as banking. among which the Plan Real of 1993-1994 was a decisive step. As discussed. and the opportunities opened by NAFTA and the Caribbean Basin Initiative. and distribution and commercial activities.a 1990-1996 of FDI inflows coincided with comprehensive macroeconomic stabilization and structural adjustment measures (Nunnenkamp. Ecuador. programme now under way. wide-ranging privatization programmes have provided opportunities for expansion. Uruguay. In this respect. Brazil. the Government of Brazil has further underscored its determination to sustain macroeconomic stability. On a much smaller scale. geographic proximity to the United States. Partly because of strong historic links with the subregion and because of their focus on local markets. As to future FDI flows. mining and petroleum. 250 . 1997b). In Mexico and the Caribbean Basin. Venezuela. taking advantage of relatively low labour costs. • inflows by Figure VIII. the recovery entry of entry. European TNCs have shown particular preference for the MERCOSUR region (IDB-IRELA. which have taken advantage of liberalization and deregulation processes ocurring across most Latin American economies. To some extent. Colombia.

Colombia Minerals: Chile. 1997 Corporate strategy Resource/asset-seeking Sector Primary Efficiency-seeking Natural resources Petroleum and gas: Venezuela. Chile. Assets • Market-seeking (national or regional) Manufacturing Services Source : 251 . The large subregional integration schemes. both Brazil and Argentina have attracted much higher FDI inflows since the constitution of that market in 1995. Colombia Telecommunications: Argentina. Investment in the automobile industries of Mexico. Venezuela. Brazil and Argentina has indeed been substantial. have generated new opportunities for foreign investors by enlarging and enhancing access to markets and applying the rules-of-origin principle on a regional basis. Central America Gas distribution: Argentina. Unit on Investment and Corporate Strategies.6 per cent came from foreign investors) may well be indicative in this respect. Peru Electric energy: Colombia. Something similar appears to be taking place in textile and apparel production. Brazil. Caribbean Basin Apparel: Caribbean Basin and Mexico Automotive: (MERCOSUR) Chemicals: Brazil Food products: Argentina. The effects also vary among integration schemes: • FDI flows driven by regional integration are most likely to have occurred in the case of Mexico’s integration with the economies of the United States and Canada in the framework of NAFTA. and on the distribution of FDI within the region. Venezuela Financial: Mexico. Argentina. further projects worth $23 billion have been announced for 1996-2000 (Voduzeck and Calderon. amounting to $12 billion during 1990-1995. Latin America and the Caribbean: FDI in terms of types of corporate strategies. Argentina. Brazil Cement: Colombia. has Uruguay which aspires to be the administrative centre of the subregion. able Table VIII. privatization and opening to world markets.2. MERCOSUR and NAFTA.Chapter VIII privatization of Telebras at the end of July 1998 for $19 billion (of which 63. Regional integration policies have also provided a stimulus to FDI in Latin America. Dominican Republic. Still. Chile. Argentina. Argentina. Peru Automotive: Mexico Electronics: Mexico. In the case of MERCOSUR. is far from clear. have very much coincided with or preceded the growth of inflows. on a smaller scale. 1998). as it is almost impossible to isolate the effects of regional integration from the effects of such domestic-policy reforms as macroeconomic stabilization. Brazil. This facilitates the establishment of regional production systems. An example is the integration of Mexican plants into the corporate production systems of United States automobile TNCs. the effect of regional integration on overall FDI in Latin America. as well as the implementation of specific policies to attract FDI. Colombia ECLAC. as witnessed by the automobile industry. Similar experiences can be found in most Latin American countries. in which the acceleration of institutional reforms and the stabilization of the economy. Chile. as.

Venezuela. But FDI diversion is likely to remain modest as the exports of East and South-East Asia and Latin America to major markets (the United States and Western Europe) are more or less complementary. Europe and various Latin American countries (including the Dominican Republic. Export-oriented FDI may. The financial crisis in Asia does not seem to have affected FDI flows into Latin America and the Caribbean so far and may not do so in the future either. Colombia and Peru. Venezuela and Peru.Tr World Investment Report 1998: Trends and Determinants • Regional integration may not (yet) have greatly improved the FDI prospects of smaller countries in the region. In some cases. in food and drink in Venezuela. Outward FDI by Mexican companies in cement in the United States. especially if regional growth and integration efforts maintain their momentum in the future. in the the financial industry in Argentina. these countries consisted of the largest and most advanced members of regional integration schemes.2). in principle. in the glass industry in the United States. Argentina and Nicaragua. be more affected as devaluations in East and South-East Asia have improved that region’s relative locational attractiveness. A recent analysis of the distribution of German FDI within MERCOSUR. was still primarily directed to the traditionally preferred host countries (Nunnenkamp. this represented the response of firms to the opportunities offered by the privatization of companies in their sectors in other countries of the region. 37 per cent of the firms that replied to the UNCTAD/ICC survey on the effect of the Asian financial crisis on FDI to and from Asia indicated that they would expect to expand their engagement in Latin America and the 252 . and should generate a platform for the growth and development of regional TNCs. * * This trend towards increased outward FDI can be expected to continue. in others they appear to have responded to the incentive provided by subregional integration schemes. if there was any. and in financial services in Argentina. outward FDI by Argentinian companies in the agriculture/ food industry of Brazil. even though systematic statistical information remains scarce (figure VIII. and in the commercial sector in Argentina and Peru. Brazil. *** The prospects for FDI remain positive in the region. and Uruguayan outward FDI in the commercial sector of Argentina. One interesting new FDI feature in Latin America and the Caribbean is the fast growth of outward flows. Within MERCOSUR. Colombia and Guatemala).2 With few exceptions. a rise of almost $7 billion over 1996. One reason for this is that the bulk of FDI in the region is still oriented towards local or regional markets. the Andean Group and the Central American Common Market showed that integration-induced FDI. 1998). Colombia. Some examples are: * Outward FDI by Chilean electricity companies in the electricity generation industry of Argentina.3 Still. Brazilian outward FDI in the automobile and autoparts industries and the financial industry in Argentina. Outward FDI flows from the region reached $9 billion in 1997.

most countries stabilized their economies and implemented --or began to implement-.including. particularly to serve their home market. however. export-oriented FDI in manufacturing in the region is mostly directed to the United States market and based in Mexico or the Caribbean Basin.6 Thus. exports and the balance of payments Prior to recent trade policy reforms and the increasingly outward orientation of countries in Latin America and the Caribbean. TNCs in home countries that have not paid much attention to the region thus far -. The policy environment for FDI has. Finally. given the relatively low transaction costs associated with them on account of geographic proximity and the institutional framework within which they take place (NAFTA. Caribbean Basin Initiative. HTS 9802 tariff item). This applied especially to FDI in such capital-and-skill-intensive manufacturing industries as chemicals and transport equipment in which the region lacked comparative advantage. given the financial constraints Asian TNCs currently face. 1995. the main forces driving FDI into the region should remain strong. Although they have become less important for the region as a whole. foreign firms established local production facilities in order to serve local markets and. this section concentrates on this particular dimension.may increasingly turn to it. p. since the region no longer enjoys the high rates of return guaranteed by 253 . they appear to have acquired “full and generalized force in the late 1980s and early 1990s” (Edwards. Some manufacturing industries are also likely to draw in new FDI as TNCs consolidate their regional production systems. What factors have motivated TNCs to return with such force to the region in the 1990s? Have recent FDI flows into the region increasingly sought resources and efficiency rather than markets? The answers to these questions have implications for a wide range of development dimensions. especially in the automobile industry. On the other hand. European and Asian TNCs may also become active in this respect. Given the region’s long history of problems with its external balance. It is not likely that devaluations in Asia will seriously affect the competitiveness of these operations. FDI. Efficiency-seeking FDI should continue to grow as United States TNCs continue to take up the opportunities provided by Mexico.large-scale structural reform programmes. Investment in the modernization of previously privatized firms and of foreign affiliates in the services sector should also continue. eventually. privatizations (especially in Brazil) will remain an important factor. the efficiency and international competitiveness of these facilities was not a major concern. it seems pertinent to ask whether its nature has also changed. 8). While the timing. TNCs used FDI largely to overcome import barriers. as they follow the lead of United States TNCs. if the region’s strong economic performance continues. They have privatized a large number of state-owned firms and opened their economies to international competition. After the difficult decade of the 1980s. as import protection supported high rates of return. intensity and scope of these reforms have differed across countries. 5 In the immediate future. however. as TNCs compete for fast-growing local markets.Chapter VIII Caribbean. Central America and the Caribbean as export platforms. B. changed substantially in the region over the past few years. Japan -.4 although some reduction in FDI from crisis-affected developing Asian economies is likely in the short and medium term. Since FDI has boomed in this new environment. More specifically.

for example. the export performance of the region was poor. never went much over 20 per cent of total sales. the countries of Latin America and the Caribbean have certainly improved in this respect. In particular. has recent FDI become more export-oriented as might be expected? And.a 1983-1995 composition of FDI and the existence of (Percentage) specific policies to attract export-oriented FDI. The export propensity of United States manufacturing affiliates in Latin America as a whole increased to 26 per cent in 1995 (table VIII. Among these propensities of United States majority-owned propensities majority-owned are exchange-rate management. several factors can affect the export able expor xport Table VIII. East and South-East Asia and the Pacific Asian newly industrializing economies 0 0 12 1 20 3 1 60 70 0 0 2 46 34 1 2 63 64 35 49 21 b 4 29 7 9 63 65 46 88 20 49 b 40 8b 11 51 63 c Source : United States. particularly in the manufacturing sector. Total sales minus local sales as per cent of total sales.Tr World Investment Report 1998: Trends and Determinants protectionism. 1998). Indeed. The export propensity of foreign affiliates was low until the 1990s. Region/economy 1983 1986 1990 1995 In recent years. Colombia 4 4b 5 12 Even though trade liberalization and other structural reforms may be aimed at integration into the world economy. exports have soared from $15 billion in 1970 to $288 billion in 1997 (IMF. In the 1990s. FDI is not likely to become more world-marketoriented if exchange-rate policies work against the international competitiveness of local production. 1997/1998). Even if structural policy conditions seem appropiate for integration into the world economy. whatever the answer to this question. of course. 7 Overall. This. this point is specially relevant as the Costa Rica Dominican Republic Ecuador Jamaica Mexico Peru Venezuela South. good macroeconomic management is an important condition of their success. through the 1980s. 1997). 1997a. applies equally to domestic companies.3). 254 . foreign affiliates in manufacturing. The export orientation of FDI When the model of import-substitution industrialization predominated in much of Latin America and the Caribbean until the 1980s. Department of Commerce. More generally the 33 largest foreign affiliates among the 100 largest companies in the region generated 37 per cent of the total exports of these companies in 1996 (América Economía. the sectoral manufacturing. IDB. Latin America and the Caribbean: export propensity of foreign affiliates. The partial evidence available in this area appears to show that modest changes are occuring. exports by majority-owned manufacturing affiliates of United States firms in Latin America and the Caribbean. 1994. various years. while they never fell below 60 per cent in the Asian economies (table VIII.3. In Latin America. what are the possible implications of recent and current FDI flows for the balance-of-payments position of the region? 1.3) and the contribution of all foreign affiliates to the manufactured exports of Brazil reached 48 per cent in 1996 (SOBEET. a b c Expor ts as per cent of total sales. all of these elements have combined in different forms across different Latin America and the Caribbean 15 20 21 26 subregions of Latin America and the Argentina 12 16 b 26 b 19 16 17 14 15 Caribbean to determine quite different Brazil Chile 20 0 40 28 patterns of FDI.

Other service industries in which FDI can contribute directly to exports include tourism. In the 1990-1996 period as a whole. In general. which could then be developed to support other potentially exportable services such as 255 . UNCTAD. FDI in this sector constituted 12 per cent of FDI inflows in 1990-1996 for a group of countries accounting for two-thirds of inflows in 1996 (table VIII. In Costa Rica. 1994b). especially business-related services like data processing and accounting. For seven Latin American countries taken together. Advances in micro-electronics have offered some developing countries opportunities to generate foreign currency receipts by supplying such services to clients all over the world. to become tradable (Sauvant.Chapter VIII exchange rate has frequently been used as a nominal anchor in macroeconomic stabilization programmes. FDI in these service industries may offer some limited opportunities for catching up. focused on local markets. In Argentina. as local sales are typically of marginal importance. The region’s share of FDI in this sector has basically remained constant throughout the 1990s. These sectoral distinctions are important as they allow some indirect evidence to be obtained on current trends in the export orientation of FDI in the region. relative comparative advantages and the policy environment. investment in the generation. if not exclusively. opportunities for investment have been identified in call centres to support the electronics industry. 1997). while its share was exceptionally low in Brazil. 1990. technological change is allowing some services. 9 Privatization programmes in various Latin American and Caribbean countries were the major policy determinant underlying the shift of FDI into services. investments in the primary sector are mostly export-oriented. FDI in the primary sector tends to generate a stream of foreign-exchange revenues. In Brazil. air transport and distribution networks. This has been done to break inflationary expectations but has typically led to the real appreciation of national currencies (Nazmi. especially Brazil and Chile. FDI in service industries provides a sharp contrast to FDI in natural resources.8 although with considerable variation among countries. the share of FDI in services doubled in total inflows from 31 per cent in 1990 to 61 per cent in 1993. although FDI in this sector can have indirect effects on the export performance of other sectors of the economy. While Latin America and the Caribbean have lagged behind Asian countries (notably India) in this respect. dropping to less than 1 per cent in 1996.4). but declined thereafter to 47 per cent in 1996. FDI in services constituted more than a half of the total. transport and distribution of electricity and gas is thought to offer good prospects of exports to neighbouring countries. as most services are not tradable across borders and thus generate only marginal export revenues. for example. as well as petroleum and gas in Colombia and Venezuela. The sectoral composition of FDI is also relevant in its potential effect on exports. Although recent investment in services in the region is in non-tradable industries. Resource-seeking FDI accounted for almost half the flows to Chile and Colombia during 1990-1996. FDI in services accounted for about two-thirds of total inflows during 1990-1996. Companies operating in the tertiary sector are very strongly. Examples of natural-resource-seeking FDI are mining in Argentina. except for Peru (table VIII. energy and telecommunications. depending on the size of the local market. including infrastructure. Chile and Peru. however. FDI in the secondary sector has a more mixed character.4). impairing the export performance of both domestic companies and foreign affiliates. the highest share among the countries for which data are available.

.. Nonetheless. none of the foreign affiliates in the service sector belonging to the top 100 companies in the region reported any exports (América Economía. Unit on Investment and Corporate Strategies. .. In 1996... based on data provided by ECLAC. Refers to gross incomes.. by sector.4.. . able inflows by sector. starting from 1994 but not including re-invested earnings or intra-firm loans. . 256 . .Tr World Investment Report 1998: Trends and Determinants telemarketing. . Note: figures presented in this table are not necessarily based on balance-of-payments data. . 958 325 819 817 1991 2 439 . FDI inflows in selected Latin American countries. 2 857 4 1 340 1 377 1 320 837 104 379 501 324 160 17 2 400 157 1 199 1 019 45 2 17 26 . 1990-1996 (Millions of dollars) Country Arg Ar g entina Primary Manufacturing Ser vices Brazil a b Primary Manufacturing Ser vices Chile c Primary Manufacturing Ser vices Colombia Primary Manufacturing Ser vices Mexico Me xico b d Primary Manufacturing Ser vices P eru e Primary Manufacturing Ser vices Venezuela Primary Manufacturing Ser vices Latin America f Primary Manufacturing Ser vices 8 1 2 2 1990 1 836 . Figures for the period 1990-1995 correspond to stock variation.. 3 028 1 818 378 832 2 317 859 614 844 8 430 142 3 902 4 380 1 094 173 147 774 333 40 127 167 845 487 946 546 30 3 9 14 1996 5 1 1 2 090 014 538 538 10 409 96 1 843 4 749 4 801 1 052 951 2 798 3 322 1 172 675 1 475 6 122 94 3 498 2 530 618 91 331 197 395 25 235 135 757 543 071 422 Source: a b c d e f UNCTAD. not including capital repatriation to the countr y of origin or the FDI income under intra-firm loan form. Only countries included in this table. most FDI in the tertiary sector in Latin America and the Caribbean still goes into non-tradable services. So they do not correspond to FDI cited elsewhere in the World Investment Repor t 1998 . 1 437 100 427 831 982 471 271 240 457 314 131 12 6 012 80 3 088 2 710 33 9 15 9 224 19 187 18 11 583 992 4 120 3 820 1992 4 014 1 015 438 2 561 1 395 53 -585 1 884 999 588 145 266 729 521 89 119 7 397 120 4 013 3 079 176 129 10 37 1 950 28 400 1 522 16 2 4 9 659 454 509 468 17 1 4 10 1993 2 514 234 677 1 603 7 054 -88 1 730 5 241 1 730 923 495 312 959 585 217 157 4 535 213 1 281 3 092 129 54 75 375 14 280 81 295 880 733 561 31 3 10 17 1994 3 116 452 1 601 1 063 9 520 252 1 654 8 041 2 531 1 849 362 320 1 667 904 398 366 11 503 104 6 153 5 232 2 808 310 52 2 445 701 40 347 314 846 911 568 781 24 3 6 9 1995 4 783 454 1 779 2 550 4 860 . Includes unspecified FDI. Table VIII. Not including intra-firm loans... Corresponding to a stock variation. .. Refers only to FDI operations developed under L-D 600.. 1997/1998). whereas those for 1996 correspond to flow distribution.. Including impor ts of capital goods by in-bond processors. Does not include FDI incomes under Ar ticle 14 of the “Summar y of International Exchange Guidelines of the Central Bank”. . including related loans..

if there have been any major changes in the export orientation of FDI in the region.9 15. Thus. by 100.Chapter VIII Investments in the tertiary sector can. however. still have important indirect exportenhancing effects. compared to 10 and 22 Mexico (all sectors) 17.7 5. Latin America and the Caribbean: export intra-firm trade is a relevant indicator. it can be important for modernizing FDI stocks and improving export capabilities in manufacturing industries.3 per cent in 1995 (Mortimore et al.10 Some of the recent service inflows may thus make a useful contribution to eventual exports in other sectors. the share of manufactures in overall exports from Latin America increased from 15 per cent to almost 50 per cent (UNCTAD. has not necessarily allowed the countries in the region to keep up with their main competitors in this sector from other regions.5 17. although they are almost impossible to measure.1 31. as a whole.9 22.7 Manufacturing the foreign manufacturing affiliates among the largest 100 companies in the region Brazil (all sectors) 4. from 18 per cent in 1994 to 34 per cent in 1996. on the other hand. which doubled its share to 15. Given their large scale of production and the location of their main markets. The propensity of the top 100 companies in Latin America in propensity share of intra-firm trade involving foreign by company selected countries.8 5. companies in the primary sector generally have very little choice but to export large proportions of their production.4 5. On the whole. however. 1997/1998.. however. Manufacturing 10.1 4. automobiles. While FDI in non-tradable service industries typically depends heavily on imports of capital goods.3 increased even more. figure II.1 per cent in 1995.4) to 1994 1996 22 per cent in 1995 in the total trade between Domestic Foreign Domestic Foreign firms affiliates firms affiliates the United States and Latin America and the Region/Country Caribbean (United States. The region’s share in OECD imports of manufactures (mainly apparel. they should mostly be found in the manufacturing sector. industry does seem to have played a role in a Export propensity is defined as the ratio of exports to sales multiplied improving the region’s export performance. for which the significance of able expor xport Table VIII.3 71.3 48. FDI in manufacturing Source : América Economía. This increase.6 71. During the 1980-1994 period. 257 . Department of Latin America sectors) 15.5 33.4 per cent for domestic firms (table VIII. The export propensity of Manufacturing 9. infrastructure and service bottlenecks have been among the biggest burdens on the international competitiveness of local production in Latin America. as TNCs operating in this sector have a much clearer choice between producing for exports and producing for local markets.6 29. 1997e).6 20.7 21. a rather modest increase in comparison with developing Asia. This applies particularly to United States TNCs. 1997a). a large proportion of primary and tertiary operations have their relative export capacity pre-defined by markets and technologies. 1995a.8 per cent in 1980 to 3.2 6. With respect to the operations of TNCs. most companies operating in the service sector must generally gear their production to local markets. Indeed. 1997).4 Thus.a by sector of activity and company manufacturing affiliates majority-owned by status.3 Manufacturing 8. trade liberalization in the region seems to have provided greater opportunities to integrate foreign manufacturing affiliates into the regional or global networks of their parent companies.2 (all sector s) Commerce. electrical machinery and electronic equipment) rose from 1.2 48. Given the non-tradable character of their products.5. 5). 1994 and 1996 United States TNCs increased from 17 per cent in 1989 (UNCTAD.0 26.

the North American import shares of manufactures from the Caribbean Basin have increased considerably. both export achievements and the role FDI has played in them vary considerably. precisely in those industries reporting increasing shares in Mexico’s exports: automobiles and their parts. Brazil ranked second with a much lower share of 10 per cent. footwear and simple electronic equipment (e. Mexico alone accounted for more than 60 per cent of intra-firm trade of United States manufacturing affiliates in the region in 1995. tax-free operations in export processing zones and special access to the United States market. In consequence. 1998). in some manufacturing industries. Manufacturing companies investing in South America. of the 19 per cent of all textile and clothing imports that came by way of the production-sharing mechanism of the United States tariff schedule. FDI in export processing zones was the driving force behind the 150 per cent increase during 1990-1997 in the share of United States textile and clothing imports coming from the Caribbean Basin and Mexico (Mortimore. 1997b). electrical machinery and electronic equipment. The privileged market access of these trading partners is reflected in the fact that. and apparel. Department of Commerce.12 60 per cent of the inflows were concentrated in manufacturing. the share of intrafirm trade of United States foreign affiliates in total Mexican trade with the United States increased from 24 per cent in 1989 to 29 per cent in 1995. The lion’s share -.Tr World Investment Report 1998: Trends and Determinants What this means is that. pushed forward by TNCs from the United States. alarms).g.2). European and Asian companies have lagged far behind in this respect. various years). on the other hand. However. Mexico ranked second behind China in gaining OECD import-market shares of manufacturers during 1980-1995 (1. particularly in order to meet the competition from Asian suppliers in the United States (Mortimore. operating more or less independently of their parent companies or sister affiliates in other regions (IDB-IRELA. The integration of manufacturing affiliates in the region into global production networks is an uneven phenomenon. Company strategies in this respect have differed in accordance with the countries (or subregions) in which they invest and with respect to their country of origin. the Caribbean Basin and Mexico together provided over 90 per cent (United States. still seem to be very much oriented to serving local or subregional markets. where FDI has been the principal factor behind the rise of exports emanating from export processing zones in the Caribbean Basin (box VIII. 1997a). making use of low wages.14 The evidence regarding the Caribbean Basin seems relatively clear. respectively (United States. Department of Commerce. 1995).4 percentage points). foreign investors’ adjustment to the new policy environment in Latin America and the Caribbean has resulted in a progressive integration of parts of the region into regionalised or globalized production based on comparative advantage. The strongest movement towards integration of manufacturing affiliates into global production networks has taken place in Mexico and the Caribbean Basin. In the case of United States TNCs. while in Brazil the corresponding figures were 21 and 23 per cent.almost 60 per cent -originated from the United States. particularly in MERCOSUR countries.11 It accounted for 40 per cent of exports from Latin America and the Caribbean and was the largest recipient of FDI in the region during the first half of the 1990s. 258 . Within Mexico. United States TNCs have increasingly established assembly sites in the area. 13 European TNCs accounted for around 20 per cent of FDI flows into the region during 19941997 and Japanese firms for less than 4 per cent. This is especially the case with apparel.

3 per cent in 1990-1996 (IMF. to 0. usually in export processing zones. on the other hand.but much of it goes into the establishment of assembly operations. and other computer TNCs may be following suit. is closely linked to the expansion of assembly operations. FDI in the Caribbean Basin and the NAFTA challenge FDI in the Caribbean Basin has many distinct sectoral destinations -.11 per cent. while intra-MERCOSUR trade relations expanded. might be evolving towards activities that respond better to local developmental needs.44 and 0. A combination of special access to the United States market in the form of production sharing (the HTS 9802 tariff regulation and the Caribbean Basin Initiative). It succeeded in 1997 in attracting a large new investment in the order of $500 million from the United States computer firm INTEL for a chip-making and testing facility. for example. in part sparked by challenges such as Mexico’s NAFTA advantage. the production of apparel. because Mexico benefited from several advantages not available to the Caribbean Basin Initiative countries: the equivalent of a six-point tariff advantage. Mexican advantages. such as Costa Rica and the Dominican Republic. saw their import market shares decline or the growth of their shares in the United States market slow down. has remained relatively poor in manufactures. Brazil’s and Argentina’s combined share in world exports remained more or less constant. did not strengthen local industrialization processes (Mortimore. 1998).06 per cent in 1995 (OECD. Their import-market shares for manufactures in that market increased considerably. Source: UNCTAD. even though these were not physically located in such zones. Moreover. various issues).Chapter VIII The export performance of Brazil and Argentina (box VIII.2. especially in the case of apparel. These last two examples suggest that FDI in the Caribbean Basin. The implementation of the North American Free Trade Agreement (NAFTA) beginning in 1994 represented a major challenge to assembly operations in the Caribbean Basin. footwear and electronics activities in export processing zones became the primary link to their principal export market. coupled with tax-free operations in export processing zones. attempted to move its export processing zone activities into technologically more sophisticated areas which required more educated (and better remunerated) workers. Moreover. in 1980. the sharp competition among Caribbean Basin countries to attract such FDI meant that tax incentives thought to be temporary became permanent and fiscal benefits for the host countries were much smaller than expected (Mortimore and Peres. Costa Rica. to facilitate a more integrated industry. petroleum and mining operations. Those affected reacted in different ways. respectively. NAFTA Box VIII. measured in local production costs. The final products of these zones (primarily apparel. Their share in OECD imports of manufactures declined from 0. It attempted to extend export-processing-zone advantages to national apparel companies.tourist resorts. fluctuating around 1. no quotas on many items. For countries such as the Dominican Republic and Costa Rica.43 and 0. and local inputs counted as having “North American” content. the nature of the special-access and low-wage mechanism for these exports. The sharp rise in FDI flows into the Caribbean Basin since the mid-1980s. the expansion of export processing zones based on FDI represented a solution to the crisis in the external sector of Caribbean Basin countries. FDI in these operations has positive as well as negative aspects. Relatively higher-wage Caribbean Basin countries. 259 . 1997b). The Dominican Republic took a different stance. although these countries ranked next to Mexico in attracting FDI inflows during 1990-1996. 1997a). infrastructure and services -. On the other hand. also improved as a result of the devaluation of the Mexican currency in 1995. footwear and electronics) are aimed at the United States market. where natural resource exports were collapsing while foreign debt charges mounted. the United States. as did their net receipts of foreign exchange. This permits them to improve their ability to compete with rising imports (particularly from Asia) in the United States market. On the one hand.3). following the steep devaluations of national currencies associated with the debt crisis. allows United States firms to take maximum advantage of the relatively low wages in the Caribbean Basin. especially those in the apparel industry.

the allocation of one model to an Argentine plant to export to regional or world markets has been a key factor in allowing scale economies and contributing to the feasibility of exports. though no study of the balance-of-payments effects of FDI in Argentina is yet available. 260 . exports to MERCOSUR by foreign firms grew almost 50 per cent faster than those by domestic firms (Chudnovsky and López. foreign firms also had a higher share than domestic firms in the total imports of the 1. with the exception of traditional resource-seeking investment geared to the world market (i. During 1990-1994. which generally require more advanced technologies in their manufacturing. Foreign firms have obviously been quicker than local firms in taking advantage of the opportunities created by subregional integration. In the case of exports to MERCOSUR. the production of which was discontinued. Once ongoing investments are made and efficiency gains are consolidated. particularly to the Brazilian market. imports of final or intermediate goods are generally far more important than exports for the remaining foreign firms. exports in the automobile industry and other manufacturing industries. though intermediate products also grew rapidly. Much of it will depend on the global and regional strategies of the TNCs to which the affiliates belong. depend only on local conditions. imports increased from $264 to $2. Imports of final goods increased the most. Affiliates complemented local production with imports from parent companies or sister affiliates. foreign firms may be in a better position to increase their exports. Finally.Tr World Investment Report 1998: Trends and Determinants Trade affiliates Box VIII. the growing trend observed in dividend payments to parent companies may soon become a policy issue. In the automobile industry. accounting for 58 per cent of these imports. In fact. Intra-firm trade by surveyed firms accounted for 83 per cent of exports and for 92 per cent of imports in 1994.102 million. on the other hand. Thus. Larger export coefficients by foreign affiliates in Argentina and their greater integration into the production systems of their parent firms does not. much faster than exports. Trade by foreign affiliates in Argentina During the 1993-1996 period. This situation may change in the future. Source: Chudnovsky and López. Though significant. which increased from $796 to $1. In the same period. the share increased from 42 per cent to 50 per cent. exports by the largest 1. were far lower than imports into them.126 units in 1990 to 208. led to growing imports of capital goods. Imported final goods. Although foreign firms registered a positive trade balance in 1996. with the exception of food processing. Whereas all surveyed firms increased imports. which was explicitly allowed by the regulatory framework. exports of vehicles have grown significantly.3. and 1998.978 million. The remaining firms had low export coefficients.e. especially if a more favourable macro environment for export growth emerges.000 leading exporters in 1996. the share of foreign firms in the external sales of the leading 1. while exports by foreign firms in this group grew by 105 per cent. Greenfield investments and investments in the modernization of existing stocks. the principal reason was that they are the leading exporters of commodities.217 in 1997. The sharp increase in imports during this period was mostly due to trade liberalization and greater economic activity. in agricultural commodities) and efficiency-seeking investment in automobile and autoparts production (which lead in both imports and exports). 1998). However.000 exporters of the country (accounting for 92 per cent of exports) increased by 80 per cent. 1997. The greater share of foreign affiliates in imports than in exports in these estimates is in line with the information collected in firm surveys. however. The increase in imported inputs was partly a consequence of a reduction in the domestic content of automobiles.000 exporters increased from 34 per cent in 1993 to 38 per cent in 1996. This trade increased the most within MERCOSUR (Chudnovsky and López. were aimed at more wealthy consumers or meant to replace local goods. partly reflecting the progressive integration of Argentinian plants into regional production systems. increasing from 1. On the other hand. increases in exports were mostly registered by foreign affiliates producing agricultural commodities and by affiliates in the automobile industry. 1998).

while in the case of Mexico it had doubled. particularly from Germany. jumped from 58 per cent in 1994 to 86 per cent in 1995. This partly responds to the peculiarities of their historical links with the region and to the better opportunities for re-localization they find in other areas.5). On the other hand. in Brazil. This is also true more generally of the export propensities of the largest foreign manufacturing affiliates in these two countries.Chapter VIII Although these figures suggest that United States manufacturing affiliates in Latin America and the Caribbean are shifting from a stand-alone and domestic-market-orientation strategy towards globally integrated production systems. as a percentage of total production. Other factors include the effect of the maquiladora (assembly) programme in Mexico. especially chapters V and VII). only 43 per cent of net FDI flows from the United States to the region (again excluding offshore financial centres) went to Argentina and Brazil. Export propensities of United States affiliates were similar in Brazil and Mexico in the early 1980s (table VIII. the export propensity of foreign affiliates did not increase. Indeed. while 33 per cent had Mexico as their country of destination (IDB-IRELA. the export propensity had declined by 1995. Although these trends also respond to longer-term factors. and issues related to exchange-rate management. Even though causal relationships are not clear. on the other hand. There are several factors which combine to explain this difference. it decreased slightly from an already low 6 per cent to 5 per cent (table VIII. TNCs from different home countries have manifested different sectoral and geographic orientations in their investment in the region. France and Spain. during the same period. the size of the potential internal and subregional markets of these countries. the export share of Brazil’s production of passenger cars declined from 22 per 261 . or even declined.VII. while only 13 per cent went to Mexico.5). The export propensity of foreign manufacturing affiliates belonging to the 100 largest companies in the region that are located in Mexico increased from 49 per cent in 1994 to 71 per cent in 1996. The devaluation restored international competitiveness at a time when the Mexican foreign affiliates in the automobile industry had become more deeply integrated into the corporate networks of their parent firms. Another factor that may help in explaining these differences is the exchange-rate regime of the host countries. At the same time. the recent developments of the automobile exports of Brazil and Mexico underscore the importance of this factor. recent research into the motivations of the investment behaviour of TNCs from different regions suggests that European TNCs. Brazil and Mexico and thus reduced the international competitiveness of local production. Thus.3). In part. Mexico’s exports of passenger cars. 1998). however. such as Central and Eastern Europe and North Africa (IDB-IRELA.15 the different strategies followed by TNCs from different home countries. before declining slightly to 80 per cent in 1996 (annex table A. which involved an upgrading of quality and facilitated the switch to exports. which have helped domestic and foreign firms located in Mexico to penetrate the North American market. have a marked orientation towards the provision of local markets. One is clearly Mexico’s membership in NAFTA and its geographical proximity to the North American market. they also reflect regional differences. this is the result of the sudden decline of domestic demand and of the devaluation of the Mexican peso. 1998. when exchange-rate-based stabilization programmes induced a real appreciation in Argentina. 55 per cent of accumulated net flows from Western Europe to the region (again excluding offshore financial centres) during 19901996 went to Argentina and Brazil. In the case of Brazil.

Notwithstanding these examples. the Brazilian currency appreciated by about 25 per cent in real terms. Through the introduction and dissemination of new technological and organizational capabilities. helping to upgrade the position of the country in the vertical production chain. TNCs take advantage of the large domestic markets and the potential of a division of labour within MERCOSUR. When it comes to FDI in services. General Motors.Tr World Investment Report 1998: Trends and Determinants cent in 1994 to 15 per cent in 1996 (Germany. the effects on economic restructuring are mostly indirect. 262 . By helping to ease bottlenecks in areas such as communication and transport. others (like BMW. however. extending and diversifying their productive capacities in Mexico and adapting them to international standards for export purposes. FDI can promote some limited restructuring in the primary sector. various issues). is likely to have had a productivity-enhancing impact in recent years. Apart from making the sector more dynamic. FDI may help to expand the productive capabilities of other sectors of the economy. TNCs use the country as a production base for supplying developed country markets. Specifically. Brazil and Mexico over the next few years (section A). mixed and suggests that the magnitude and character of these effects vary across sectors and countries. 1995a). helping them move towards becoming service economies. may facilitate industrialization in products with high natural resource contents. particularly for economyclass cars. In the first two. as the example of Asia has shown (UNCTAD. notably in North America. however. As a consequence. Corporate strategies adapt themselves to country-specific policy environments. More broadly. Although many of the same corporations are involved in these three countries. The potential contribution of FDI to the developmental prospects of host countries. The evidence available in this respect for Latin America and the Caribbean is. on the other hand. Chrysler. is much broader than its contribution to foreign exchange earnings. The generation of forward linkages. FDI can make a contribution to economic restructuring in host countries. Foreign automobile manufacturers have planned to make heavy investments in Argentina. however. during this period. most primary production by TNCs in the region still concentrates on the extraction and export of natural resources with little domestic value added and little effect on domestic restructuring. Ford. Mexico has good prospects of improving its global performance in the automobile industry. The automobile industry again provides an illustration. VDA. Chrysler and some Asian firms) are seeking new market niches.4 ) may constitute an example of the latter. These effects are very difficult to measure but the operation of TNCs in this sector in the 1990s. moreover.16 Some TNCs (mainly FIAT. General Motors and Volkswagen) are investing to defend their market shares in Argentina and Brazil. this can lead to the export of goods based on natural resources with higher domestic value added and can promote efficient import substitution in other sectors. FDI in this sector can help economies in intersectoral restructuring. the strategies they pursue are different in different countries. Ford. The role of FDI in the development of the agro-industry in Chile provides an example of the former and the prospects for development of the petrochemical industry in Argentina (box VIII. given its quantitative importance. All this suggests that the export potential of FDI depends in part on host countries themselves. In Mexico. Nissan and Volkswagen are modernizing.

that promote industrial upgrading. At a later stage. 1995). the fact that the recent FDI boom in Latin America has been accompanied by large and rising current-account deficits has revived concerns over the negative balance-of-payments impact of FDI. Under conditions of import substitution. There is also some evidence. for instance. Import protection reduced competition and hindered the development of efficient local suppliers. even though they were often obliged to meet local content requirements. Policies that improve skills and human resources. Government policies have an important role to play in attracting FDI into activities with a greater potential effect on development. This is the case with an important proportion of manufacturing FDI in Mexico and the Caribbean Basin. 1998).Chapter VIII The most important restructuring effects. p. however. In Brazil. 1998). In assembly operations that take advantage of relatively low wages. internal linkages are typically weak and the effect on economic restructuring low. Indeed. when import-substitution strategies prevailed in the region. their reliance on imports tended to be higher than that of domestic companies (UNCTAD. All of these affect a host country’s balance-of-payments situation. of TNC operations that have aided economic restructuring and advanced development.which could have created indirect growth effects -.2 billion in 1994 to $33 billion in 1997 (IDB. if any. the incorporation of a larger and more sophisticated domestic component in manufactured goods and. where a large proportion of recent FDI in manufacturing has been concentrated. which has had little effect on economic restructuring. there are profit remittances as well as royalties and licence fees to be paid to parent companies. machinery and equipment has to be imported in order to set up local production facilities. An example is the Mexican automobile industry.. these direct effects of FDI are not compensated for by indirect effects. At the early stage of FDI projects. however. help to attract FDI in more dynamic manufacturing activities. This became increasingly obvious towards the end of the import-substitution period. 1995a. in parallel with FDI inflows rising from $3 to $17 billion. Balance-of-payments concerns The export performance of foreign affiliates is often of particular interest in the context of the balance of payments. especially in manufacturing. even though local content requirements induced foreign investors to assist local suppliers in getting access to technical information and licences (Londero et al.17 As noted earlier. 2. are likely to take place in relation to FDI in the manufacturing sector. where the modernization of management methods and the introduction of new technology have very much improved the competitive position of the industry in recent years (Mortimore. This is an issue that has received special attention in Brazil. Here the evidence for the region is uneven.tended to be weak. foreign affiliates had relatively low export propensities and. 218). that support the deepening of the supplier base and that foster the formation of industrial clusters can work towards the strengthening of internal linkages. at the same time. Backward linkages of FDI -. 263 . The balance-of-payments effects of FDI continue to be widely debated after various countries in the region have opened up to world markets in order to integrate their economies more closely into the international division of labor. the current-account deficit increased from $1.

while import growth should normalize once the adjustment of foreign and domestic investors to the new policy environment is completed. this judgment may prove to be a self-fulfilling prophecy and trade-policy reforms may even have to be reversed.will substitute for imports worth about $500 million. These points apart. This might create concerns over the potential effect of FDI inflows on current account deficits. 1998). which have been latecomers to trade liberalization.a reminder of the importance of strengthening the domestic enterprise sector. Countries such as Brazil. which was about 10 per cent of Argentina’s trade deficit in 1997 (box VIII. It would appear. During 1990-1997. even export-oriented projects usually require imports of capital goods and intermediates. In addition to foreign capital. Not that there is no reason for concern. Department of Economic and Social Development. The sustainability of currentaccount deficits cannot be taken for granted during the difficult transition period. FDI inflows can generate higher imports not only of capital but also of consumer goods because TNCs may begin by establishing sales affiliates and distribution networks.Tr World Investment Report 1998: Trends and Determinants The coincidence of booming FDI and high current-account deficits can be analysed from different angles. since they may induce an appreciation of the host country’s currency. the development effects of FDI go far beyond its direct balance-of-payments implications. Trade policy reforms tend to have the immediate consequence of rising imports whereas their effect on exports may be delayed. As for its significance as a source of financing. unless local enterprises can provide them. The new environment can also bring about efficient import substitution.each with an investment outlay of more than one billion dollars -. since the process of opening up to world markets involves considerable restructuring related to production and trade. However. they may be no more what is to be expected. the negative balanceof-payments impact is softened -. First of all. If they can. In the longer run. FDI typically supplies access to technology. 264 .4). for instance. however. to managerial and organizational skills. Thus. More broadly. If foreign investors consider the deficits unsustainable. successful economic restructuring may induce higher export growth. During the first stage. may still be in this early phase. and to foreign markets. that the exchange-rate regime itself contributes more significantly to balance-of-payments problems than do capital inflows. although this share has varied by country. UNCTAD. one might also ask how far moderate current-account deficits are a cause for alarm. even though it may be inducing more export-oriented FDI. with Argentina registering 55 per cent and Brazil 30 per cent (IDB. In Argentina. however. This is especially true in countries that have implemented exchange-rate-based stabilization programmes: fixed or quasi-fixed exchange-rate regimes can work against a favourable FDI balance-ofpayments impact. 1992a. the share of FDI in the total external capital inflows of Latin America and the Caribbean has increased and has come to represent the largest source of net external capital inflows in the 1990s. it can also contribute to economic restructuring and thus contribute to growth and development (United Nations. the first-round effects of trade liberalization on the balance of payments may be negative. the share of FDI in total net capital inflows averaged 45 per cent for Latin America and the Caribbean as a whole. In the case of Latin America and the Caribbean. it has been estimated that two large FDI projects in the petrochemical industry -. 1995a).

18 Box VIII. where fractioning and storage facilities are being built. having a negative effect on the balance of payments. Industry. the project is expected to allow for the substitution of imports worth around $320 million and to generate exports worth around $225 million. In the longer run. to reduce the import content of foreign affiliates. Argentina: two cases of investment in the petrochemical industry The petrochemical industry is fundamental to the Argentinian economy due to its strong linkage with other economic activities. if the competition-reducing effect of earlier import-substitution policies had resulted in high profit rates for foreign affiliates. Province of Neuquen.000 tons of ethane. while the LPG and gasoline will be exported. Foreign investors from the United States and Brazil will supply 62 per cent of the $430 million of capital for this project. the relative amount of direct investment income transferred to the home countries of foreign investors (notably profit remittances) may decline.000 tons of LPG and 223. Other FDI-related balance-of-payments items are likely to change only modestly. 610. Based on natural gas processing. In terms of its potential effect on the balance of payments. It seeks to establish the largest fertilizer plant in the world. which is expected to start production by the year 2000. they will have considerable direct and indirect effects on production. A plant will be established to separate liquid components from the gas which will be transported (by a poliduct. In terms of its potential effect on the balance of payments. exchange-rate policies that do not work against the international competitiveness of local production and policies that promote the generation of domestic backward linkages. the projects are implemented by TNCs in association with important local groups. payments of royalties and licence fees may increase if a more global orientation creates an incentive to use more advanced foreign technologies. Stronger backward linkages of foreign affiliates would also imply that the indirect trade and development effects of FDI would turn more positive: FDI could not only induce capital formation by domestic suppliers. Foreign investors from Canada will supply 33 per cent of the $600 million of capital for this project. based on data provided by the firms. The project involves a production plan of 562. the construction of which is also part of the project) to the city of Bahia Blanca. In both of these cases. The policy conditions required for this are. import propensities should not increase and may even decline if governments encourage the strengthening of local supply capacities. 265 . eventually lead to FDI having a more favourable balance-of-payments impact. Commerce and Mining Secretariat. but also improve their capacity to export on their own. On the one hand. Source: Argentina. in the context of a strong FDI boom. the project is expected to allow for the substitution of imports worth around $175 million and to generate exports worth around $70 million. Two projects are particularly worth mentioning since. Production will be geared to the domestic market and is expected to generate high levels of import substitution and contribute to increased productivity in the farming sector. Investment Database. which is expected to start production by the year 2000. The import propensity of foreign affiliates may rise temporarily while TNCs are adjusting to the new more open trade framework.Chapter VIII The increasing outward orientation of Latin American and Caribbean countries in the aftermath of trade policy reforms could. an important number of the leading TNCs in the industry expanded facilities in Argentina. however. under the right conditions. this project involves the construction of a plant in Bahia Blanca with a production capacity of 1. The first of these is the Mega project. During the 1990s. given their scale. among others. trade and capital formation. The second of these large investments in the petrochemical industry is the Profertil project. This is an undertaking to develop a rich natural reserve of natural gas located at Loma de la Lata.1 million tons per year of urea and 625. On the other hand. Center for Production Research. The ethane production will be used to supply Petroquimica Bahia Blanca (a firm privatized in 1995 and now controlled by foreign investors).4.000 tons of naturale gasoline per year.000 tons of ammonia.

Brazil 0.35 0. the exports-to-imports ratio of the United States parent companies should rise over time and be particularly high in countries that are more world-market-oriented.6.53 1.68 11.57 a 1.05 companies to their affiliates in Argentina and Latin America Argentina 1. although the ratio varies significantly across host countries. 1995a. the relevant balance-of-payments items cannot be divided into TNCrelated and non-TNC-related transactions.73 1. in Argentina and Brazil. This is most probably related to the expansion and Chile Colombia Costa Rica Dominican Republic Mexico Peru Venezuela Developing Asia All developed and developing countries 1.07 1. the exports of United States parent companies to their foreign affiliates are only slightly higher than the imports of parent companies from their affiliates. Department of Commerce. table IV. Frequently.06 1.94 Brazil. This propensity is also illustrated by the relatively high intrafirm exports shipped by United States and Japanese parent companies to all their affiliates abroad. 266 .82 a 0. systematic data on the imports of foreign affiliates operating in Latin America and the Caribbean are not available.77 1. it may be instructive to compare the intra-firm shipments from United States parent companies to their affiliates in Latin America with the converse shipments (table VIII. Latin America and the Caribbean: exports This is probably related to two important of goods of United States parent companies to factors mentioned above: exchange-rateimports affiliates in Latin America.39 0. For Latin America and the Caribbean as a whole.1). As noted earlier. October 1997 and August 1992 1990.14 Source : a b United States.17 18. this kind of information does not provide insights into whether the new policy environment in Latin America and the Caribbean has had negative FDI-related balance-of-payments effects due to an increasing import propensity and whether such effects have been particularly pronounced in countries like Mexico.17 b 0.94 0.55 a 1. for example.54 0.. However.77 4. which have been relatively successful in increasing exports to developed countries. relative to impor ts from of goods of parent companies from affiliates.. In the case of the Dominican Republic.45 By contrast.6). (Ratio) the latter ensuing from trade liberalization and resulting in a temporary boom in exports Region/economy 1989 1995 of capital goods of United States parent 1.05 1. The exports-to-imports ratio has in fact remained relatively stable during 1989-1995. the exports-to-imports ratio of parent companies to affiliates reached an exceptionally low level in 1995. . the ratio has indeed increased considerably during this period (from a level below one in the case of Brazil). which typically exceeded intra-firm imports shipped by the affiliates to their parent companies (UNCTAD. 1994. Thus. 0.07 .Tr World Investment Report 1998: Trends and Determinants An empirical assessment of these possibilities suffers from considerable data constraints. Most importantly. the exports of United States parent companies to their affiliates in most other Latin American host countries have declined relative to the imports of United States parent companies from their affiliates. the import propensity of foreign affiliates seems generally to have exceeded that of indigenously owned firms. Survey of Current Business. able expor xports Table VIII. based stabilization programmes and 1989 and 1995 corporate restructuring of foreign affiliates. Since United States manufacturing TNCs have been at the forefront in this development. If greater openness towards world markets involves negative balance-of-payments effects in trade.

4 6.4 3. payments of direct investment income decreased for Latin America as a whole. “other direct investment income” as defined in the source. low foreign direct investment payments could simply reflect the fact that the new stocks have not yet consolidated.9 1. Similarly.6 5.3 2. Latin America and the Caribbean: payments of direct investment incomea by Latin American host countries. in the wake of the longer-term effects of the devaluation of the Mexican peso and the consolidation of heavy investments made by United States TNCs in the first part of the decade.7 d 4. Given the high inflows Mexico received in the first half of the 1990s.0 c 7.2 5. Among Latin American countries.8 14. for which the dependence on capital goods provided by United States parent companies is now relatively low. Annual average. this ratio could be underestimating the long-term effect in a context of growing inflows. Payments of royalties and licence fees were rather low in comparison with payments of direct investment income.6 d 7. 267 .7 9.8 72. Excluding reinvested earnings.4 3. however. Payments of direct investment income increased by a factor of 2.5 53.1 2.7 between 1985-1990 and 1994-1996 (table VIII. 1985-1996 (Millions of dollars and percentage) Millions of dollars b Country Latin America and the Caribbean Argentina Brazil Chile Colombia Costa Rica Dominican Republic Mexico Peru Venezuela 1985-1990 1991-1993 1994-1996 Percentage of FDI inflows b 1985-1990 1991-1993 1994-1996 Percentage of FDI stocks 1985 1990 1996 3 889 94 1 503 262 665 16 165 628 9 164 5 742 502 1 072 752 892 20 180 1 163 94 436 10 408 992 2 425 c 1 128 1 301 18 c 118.e.8 34. 1995.8 0. various years. the partial evidence on payments of direct investment income as well as royalties and licence fees does not point to the high costs of a stronger export orientation on the part of foreign affiliates in Latin America.1 0. however.3 25. .5 5. Again.9 3. Relative to FDI inflows.6 5 Source : a b c d IMF. caution is required in interpretation.4 6.5 45 24 28.8 6.4 38.7 17.1 124.1 60.3 2. The differences across countries could reflect the different points in the maturity cycle that investments in different countries may occupy.7 25.2 29.2 50 121.7. Peru and Argentina experienced the steepest increase in payments of direct investment income. despite the stronger global orientation of the latter. the exports-to-imports ratio is likely to have declined further after 1995. This ratio. 1994-1995. even when payments unrelated to TNC operations are included able payments investment Table VIII.9 136.3 44.9 30.2 111.4 0.8 4. It should be noted though that because of the time-lag affecting direct investment payments with respect to inflows. but payments still accounted for a small percentage of inflows in 1994-1996.8 3. was still twice as high in Brazil as in Mexico. Brazil experienced a rather modest increase in payments of direct investment income but a declining payments-to-inflows ratio.7).7 2.2 15.6 4.Chapter VIII consolidation of export processing zone activities in the country.8 35.4 4.6 c 44.2 3.8 2 756 187 461 47.3 114.2 15.7 3.9 4. i. For Mexico.9 0.3 11.

8. 1985-1996 (Millions of dollars and percentage) Millions of dollars a 1985-1990 1991-1993 1994-1996 Percentage of FDI inflows a 1985-1990 1991-1993 1994-1996 Percentage of FDI stocks 1985 1990 1996 Country Latin America and the Caribbean Argentina Brazil Chile Colombia Costa Rica Dominican Republic Mexico Peru 861 370 46 32 10 9 . particularly in manufacturing.2 6.5 9.6 c 0.. the existence of a competitive real exchange rate is important to provide both foreign and domestic investors Table VIII.1 b 1. payments accounted for almost 10 per cent of FDI inflows in 1994-1995.1 1 0.8 8.7 5..2 b 1. particularly in the first stages of their investment.8). This is still an open question and promoting FDI with a long-term positive balance-of-payments effect therefore constitutes one of the great challenges facing the region.3 0.Tr World Investment Report 1998: Trends and Determinants (table VIII.4 per cent).8 2.6 15. 0. By contrast.4 1. together with a competitive real exchange rate.1 1.5 0.7 1 6.1 0. 228 4 1073 266 76 39 18 9 . however. where payments accounted for an exceptionally high percentage of inward FDI stocks in 1985 and 1990.7 0.4 c 0.... 1.9 1.4 0. Annual average 1994-1995 1995 268 .4 0.7 0.6 3.4 0. In Brazil. whereas the payments-to-FDI-stocks ratio was the same for the two countries.8 0. 462 16 1566 b 206 384 b 49 37 11 b 7 504 50 10.3 1 .5 3.6 b 1. On the macroeconomic front.6 .4 0.9 4. For example. and with appropriate governmental policies.7 Source : a b c IMF.1 9.. In the longer run.4 0. 10.. resulting from higher payments of direct investment income as well as royalties and licence fees.9 .2 4. foreign investors have begun to respond to the new policy environment and to assist.1 5. Trade reforms and greater openness to world markets may cause a temporary deterioration in the trade balance.3 0. the integration of Latin America and the Caribbean into regionalized or globalized production systems. On the other hand. there is no conclusive evidence that a closer integration of Latin America into the world economy has led to a negative balance-of-payments impact of FDI. payments of royalties and licence fees declined in Argentina. significantly above the corresponding ratio for Mexico (5. Conclusion With differences in emphasis across subregions. 8. payments of royalties and licence fees increased in both Brazil and Mexico. to some extent. the negative balance-of-payments effect resulting from the high import propensity of foreign affiliates.4 5. Governments can improve the developmental contribution of FDI and its impact on the balance of payments in several ways. notwithstanding the different TNC strategies in these two countries..4 6.5 0.2 0.2 6 5... Opposing trends prevailed in different Latin American host countries. various years. Latin America and the Caribbean: payments of royalties and licence fees able payments ro fees by Latin American host countries..5 0. the positive effect of trade reforms on the export propensity of foreign affiliates could reverse.8 .. 3. .7 14.

1997a. Latin America in fact received the highest amount of mining FDI in the world in 1996. For details.. 1997 and UNCTAD. 1997. 1998). that German TNCs have been among the slowest in their reaction to new opportunities in the region (IDB-IRELA. see Nunnenkamp. see Mortimore.g. See Mortimore et al. See. Among these is the exemption from tariffs of their imports of components. Local content requirements are defined on the MERCOSUR level. Notes 1 2 3 4 5 6 8 9 7 10 11 12 13 14 15 16 For a comprehensive analysis of FDI trends in Latin America and the Caribbean. however. reflecting a trend for services to become the single largest economic sector in most countries. 1997. some 50 to 60 per cent of FDI flows are in the services sector.Chapter VIII with stronger export incentives and to reduce their import propensities. host countries should not neglect the potential indirect trade and development effects of FDI. 1995. supporting the formation of industrial clusters and facilitating international partnering between enterprises can all enhance the developmental effect. for a detailed discussion. et al. On the microeconomic front. Finally. see CEPAL. even though they cannot be easily quantified. forthcoming b. improving the physical and human resource infrastructure.. in the automobile industry). 1992. For a discussion of revealed comparative advantage in these industries see. p. for example. whereas four-fifths of European Union imports from Latin America consisted of non-manufactured goods (OECD. policies encouraging industrial upgrading by fostering backward linkages. This qualification may be important for Brazil in particular. It needs to be kept in mind. and Mortimore et al. as United States foreign affiliates are likely to contribute considerably to intra-Mercosur trade (e. Complementarity in exports to the European Union. 1997. as they do not cover trade relations among United States foreign affiliates in different Latin American host countries. 17. 315). 1998. 1997a. Special rules for the automobile industry in MERCOSUR require a certain degree of compensating exports within members’ trade flows. Mortimore. Mexico’s inward FDI stock more than doubled from $33 billion in 1990 to $72 billion in 1996 (UNCTAD. For details. 1996. p. but only their trade with United States parent companies.. For a more detailed analysis of Mexico’s integration into globalized production. FDI in business-related services and infrastructure may enhance the international competitiveness of manufacturing industries and thus contribute to improving existing FDI stocks. FDI inflows in the last two industries were related to assembly activities (maquiladora). This programme of the Government of Mexico aims to simplify requirements and provides incentives for the operation of export-oriented economic units. WEF. 1998b. the re-imported components are tariffexempt. for example. and UNCTC. 1998a. The HTS 9802 tariff regulation allows United-States-based companies that assemble goods abroad which include components produced in the United States to pay tariffs only on the value added abroad when the assembled goods return to the United States market. Worldwide. 1997). is revealed by the fact that four-fifths of European Union imports from developing Asia consisted of manufactured goods in 1995. for example. Nunnenkamp. see Calderon. 1997a. Thus. see CEPAL. suggesting that increased FDI in Latin America and the Caribbean does not represent a switch from Asian host countries (see chapter VII for further discussion). An overwhelming majority of these respondents also indicated that they do not intend to reduce their investments in Asia. These figures tend to underrate the significance of intra-firm trade. The Economist. 6 December 1997. 269 .

Tr World Investment Report 1998: Trends and Determinants 17 18 For a more detailed discussion of the balance-of-payments effects of FDI. however. that changes in profit remittances may also be attributable to changes in tax policies. see UNCTAD. Note. ch. 270 . as the accounting practices of TNCs adapt to them. II. 1997a.

in comparison. with the Russian Federation again taking the lead.Chapter IX CHAPTER IX EUROPE CENTRAL AND EASTERN EUROPE Trends A. Romania. FDI flows into Central and Eastern Europe1 bounced back in 1997. this new record level was only slightly higher than inflows to Brazil in 1997. reaching $19 billion (FDI trends of the transition economies of Central Asia are discussed in chapter VII).1). but outward FDI stocks remained very low in comparison with inward stocks. these countries accounted for 79 per cent in 1996 and 77 per cent in 1997 of total inflows. The relation between FDI growth and GDP growth continued to be weak. mainly on account of the interest of investors in its natural resources and its infrastructure potential in basic telecommunications.2 The Russian Federation. Trends The basic FDI trend in Central and Eastern Europe resumed its upward growth in 1997 after a decline in 1996. The Czech Republic witnessed a decline in inflows for the second year since the 1995 peak. The trend was uneven. The Russian Federation. FDI inflows decreased in five countries (figure IX. While high. although the rate of decrease was lower than in the previous year. However. The Russian Federation emerged as the leader in attracting FDI for the first time. With the exception of the Russian Federation.1). with twelve countries showing growth and five showing declines. with causal links apparently extending both ways in different circumstances. Following a decline in 1996 that proved to be temporary. the relative weight of the 271 . FDI inflows increased in 12 countries of the region. Together with the Czech Republic. Poland and Hungary were the largest recipients of FDI in the region (figure IX. most of the FDI growth occurred in the secondary and tertiary sectors. Finally. Poland and Bulgaria experienced the largest increases of FDI in absolute terms. outward FDI from Central and Eastern Europe showed significant growth. with neither group homogenous in terms of progress in transition. as compared with flows in 1996 and.

Slovenia and the Russian Federation. Ranked on the basis of the magnitude of FDI inflows in 1997. Ukraine. In terms of FDI stock. Bulgaria and Latvia) increased from 10 per cent to 15 per cent. Poland is third. Except in the Russian Federation. though typically from fairly low levels.Tr World Investment Report 1998: Trends and Determinants individual members of this group changed. Poland and Ukraine) of the seven most important recipient countries. 1996 a Source : a UNCTAD. The share of Japan. neighbouring Austria is the foremost source of inward FDI. secondary and tertiary activities are of equal importance in the region’s inward FDI. the food industry. driven mainly by large projects in infrastructure and natural resources. By the end of 1997.4 United States TNCs were the most important sources of FDI. commercial activities and transport and communications attracted most of the inward FDI.1.1). the countries of Western Europe accounted for the bulk of inward FDI stock. In particular. as well as developing Asian countries. Within that sector. Poland had become the region’s leader in terms of inward FDI stock. The tertiary sector accounts for a leading share of inward FDI in Hungary. Taken together. except for the share of developing Asia in Romania and Poland. In Slovenia. behind Hungary and the Russian Federation. is low. while FDI in Romania comes mostly from France and the Republic of Korea. In services. and the second most important source for Poland and Slovenia. FDI/TNC database. followed by Germany and the Netherlands. In three (Russian Federation.3). 272 . Manufacturing dominates FDI in Poland. the growth of inward FDI in 1997 was exceptionally high in Belarus. On average. Bulgaria.3 The share of the next four largest recipients (Romania. the Czech Republic. Lithuania. Judging from data on home country shares in FDI in individ